Exchange Rate Regimes and Location

June 1, 1997

Preview Citation

Format: Chicago

Luca A Ricci. Exchange Rate Regimes and Location, (USA: International Monetary Fund, 1997) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper investigates the effects of fixed versus flexible exchange rates on firms’ location choices and on countries’ specialization patterns. In a two-country, two-differentiated-goods monetary model, demand, supply, and monetary (as well as exchange rate) shocks arise after wages are set and prices are optimally chosen. The paper finds that countries are more specialized under flexible than fixed rates, and that the pattern of specialization is not uniquely defined by trade models but depends also on the exchange rate regime. The adoption of fixed exchange rates endogenously increases the desirability of this currency area by reducing the shock asymmetry. These results also shed light on the effects of exchange rate variability on trade.

Subject: Conventional peg, Exchange rate arrangements, Exchange rate flexibility, Exchange rates, Tax incentives

Keywords: Demand shock, Net exporter, Substitution effect, WP

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1997/069
Stock No:

WPIEA0691997
ISBN:

9781451960822
ISSN:

1018-5941

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