Advanced Search
MyIDEAS: Login

Exchange rate variability and EU trade

Contents:

Author Info

  • Khalid Sekkat

Abstract

The present study focuses on international trade. The aim is to construct a small econometric model allowing the evaluation of the impact of variability on European trade.The report is organised as follows. Section I offers a conceptual analysis of the impact of exchange rate variability on trade. Section II presents previous empirical findings for Europe. The theoretical model relating variability to trade is constructed and analysed in Section III, while Section IV presents the empirical analysis and discusses the major findings. Section V sets out the conclusions. II/051/98 Exchange rate variability is a central theme in the debate on the performance of exchange rate regimes. The consequences of this variability for economic activities have always been a major concern of policy makers. After World War II, the Bretton Woods agreements created the International Monetary Fund and set up a world-wide system of fixed exchange rates. One objective of this system was to foster international exchanges of goods and services.In 1973, the Bretton Woods system was abandoned and many countries allowed their exchange rates to float. The consequence was an increase in exchange rate variability. Hence, the debate on the optimal management of exchange rates attracted renewed attention. It was enhanced by the possibility of a causal link between this increased variability and the observed decline in the growth rate of trade. Advocates of a regime of fixed rates emphasised its merits in terms of co-ordination, discipline and credibility of economic policies, as well as its role in stimulating international trade. The supporters of flexibility put forward its advantages in terms of increased autonomy in pursuing domestic policy objectives.In Europe, policy makers seemed to have been much more convinced by the merits of a regime of fixed rates. In 1972, they created the Snake, a system of fixed exchange rates among member countries. The Snake experienced a number of realignments and the entry and exit of various member countries, which substantially weakened its credibility. A new system of fixed rates was therefore set up in 1979 : the Exchange Rate Mechanism of the European Monetary System (the ERM of the EMS). Despite several realignments during the early eighties, the ERM has succeeded in stabilising exchange rates between member countries. After 1983, realignments become smaller and rarer, and between 1987 and 1992 there was almost no realignment. The stable environment (with respect to exchange rates) during the period 1987-1992 was favourable to the concept of creating Economic and Monetary Union (EMU) in Europe. Some economists argued that the move to EMU should pose no problems because within the ERM, realignments were no longer needed.To illustrate the European experience with exchange rate management, Figure 1 presents the variability of the nominal effective exchange rates (NEER) of four currencies (those of Belgium, Germany, France and Italy) between 1970 and 1995. The variability is computed as the yearly standard deviation of monthly percentage changes in nominal effective exchange rates. Comparing the pre-ERM period to the ERM period, it appears that member countries experienced lower variability in the ERM period. Even during the ERM crisis in the early 1990s, variability is lower than during the pre-ERM period for member countries. The most stable period is clearly 1987-1991. Figure 1 shows that during the ERM period, a non-member country (i.e. the UK) experienced a significantly higher level of variability than the ERM countries . Hence, the ERM may clearly be credited for having reduced exchange variability among participating countries.An abundant empirical literature has analysed the recent European experience of fixed exchange rates. The conclusions of such analyses are of prime importance when examining the potential impact of EMU in Europe. The analyses investigate various aspects of the ERM experience : transmission of shocks, nominal and real convergence, policy co-ordination, international trade, etc.The present study focuses on international trade. The aim is to construct a small econometric model allowing the evaluation of the impact of variability on European trade.The report is organised as follows. Section I offers a conceptual analysis of the impact of exchange rate variability on trade. Section II presents previous empirical findings for Europe. The theoretical model relating variability to trade is constructed and analysed in Section III, while Section IV presents the empirical analysis and discusses the major findings. Section V sets out the conclusions.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://ec.europa.eu/economy_finance/publications/publication11215_en.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 127.

as in new window
Length: 83 pages
Date of creation: Feb 1998
Date of revision:
Handle: RePEc:euf:ecopap:0127

Contact details of provider:
Postal: Coomunivcations Unit, B-1049 Bruxelles / Brussels
Fax: +32 2 298.08.23
Email:
Web page: http://ec.europa.eu/economy_finance/index_en.htm
More information through EDIRC

Related research

Keywords: bretton woods; exchange rates; trade;

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Khalid Sekkat, 2001. "On the Aggregate Impact of Exchange Rate Variability on EU Trade," German Economic Review, Verein für Socialpolitik, vol. 2(1), pages 57-78, 02.
  2. Eduard Hochreiter & Klaus Schmidt-Hebbel & Georg Winckler, 2002. "Monetary Union: European Lessons, Latin American Prospects," Working Papers Central Bank of Chile 167, Central Bank of Chile.
  3. Silvana Tenreyro, 2003. "On the trade impact of nominal exchange rate volatility," Working Papers 03-2, Federal Reserve Bank of Boston.
  4. Ramos, Raul & Clar, Miquel & Suriñach, Jordi, 2000. "Trade And Exchange Rate Variability: New Evidence From Eu Countries," ERSA conference papers ersa00p103, European Regional Science Association.
  5. Honohan, Patrick & Lane, Philip R, 1999. "Pegging to the Dollar and the Euro," International Finance, Wiley Blackwell, vol. 2(3), pages 379-410, November.
  6. Lionel Fontagné & Michael Freudenberg, 1999. "Endogenous Symmetry of Shocks in a Monetary Union," Open Economies Review, Springer, vol. 10(3), pages 263-287, July.
  7. Michel Fouquin & Nanno Mulder & Laurence Nayman & Khalid Sekkat & Joffrey Malek Mansour, 2001. "Sector Sensitivity to Exchange Rate Fluctuations," Working Papers 2001-11, CEPII research center.
  8. Agnès Bénassy-Quéré & Amina Lahrèche-Revil, 2003. "Trade Linkages and Exchange Rates in Asia: The Role of China," Working Papers 2003-21, CEPII research center.
  9. Paul Grauwe & Frauke Skudelny, 2000. "The impact of EMU on trade flows," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 136(3), pages 381-402, 09.
  10. Attila Csajbók (ed.) & Ágnes Csermely (ed.), 2002. "Adopting the euro in Hungary: expected costs, benefits and timing," MNB Occasional Papers 2002/24, Magyar Nemzeti Bank (the central bank of Hungary).
  11. Olimov, Ulugbek & Sirajiddinov, Nishanbay, 2008. "The Effects of the Real Exchange Rate Volatility and Misalignments on Foreign Trade Flows in Uzbekistan," MPRA Paper 9749, University Library of Munich, Germany.
  12. Belke, A. & Gros, D., 1997. "Estimating the Costs and Benefits of EMU: The Impact of External Shocks on Labour Markets," Discussion Paper 1997-95, Tilburg University, Center for Economic Research.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:euf:ecopap:0127. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ECFIN INFO).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.