Discussing Euro Volatility
AbstractThis paper deals with Euro introduction and ask whether it is likely to increase the exchange rates volatility on a world-wide scale. Following this purpose, we present a three country-model (US, Germany and France) and compare the exchange rate volatility according to the nature of the shock (demand or supply shock) and to the exchange rate regime in Europe (flexible, EMS or EMU). Each country is represented by two authorities: a central bank and a government (a single central bank and two governments in Europe in the case of EMU). Within this framework, we compute Nash-equilibria. In theory, the exchange rate of a large closed country fluctuates more than the exchange rate of a small open country (the size effect), but results are ambiguous in the specific case of the Euro. An increase in volatility would only occur after demand and external supply shocks. Volatility would be reduced following internal supply shocks. The conclusions are the opposite if the sensitivity of intra-European trade to relative prices is particularly strong. In the case of common shocks in Europe, the excess of volatility would help economic stabilisation. As for asymmetric shocks (hitting only one country), the Euro would fluctuate less than the currency of the hit country in the previous monetary system (EMS), but this stability would harm economic stabilisation, as loss functions show. We note also that the independence of the ECB could lead to strong variations of the Euro after inflationary shocks if the ECB and European governments do not share the same inflation target. The constraints on fiscal policies which are induced by the Stability pact could make more active monetary policies necessary: these would be a source of instability for the Euro.
Download InfoIf 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.
Bibliographic InfoPaper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 1998-03.
Date of creation: 1998
Date of revision:
Publication status: published under the title " May the Euro Increase Exchange Rate Volatility? ", in T. Moser & B. Schips (eds.), EMU, Financial Markets and the World Economy, Kluwer Academic Publishers, October 2000.
Other versions of this item:
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
- F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Cohen, Daniel, 1997.
"How Will the Euro behave?,"
CEPR Discussion Papers
1673, C.E.P.R. Discussion Papers.
- Henri Sterdyniak & Pierre Villa, 1993.
"Régimes de change et coordination des politiques économiques en Europe,"
Revue de l'OFCE,
Programme National Persée, vol. 43(1), pages 307-348.
- Henri Sterdyniak & Pierre Villa, 1993. "Régimes de change et coordination des politiques économiques en Europe," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(1), pages 307-348.
- Gordon M. Bodnar & Leonardo Bartolini, 1995.
"Are Exchange Rates Excessively Volatile? And What Does "Excessively Volatile" Mean, Anyway?,"
IMF Working Papers
95/85, International Monetary Fund.
- Leonardo Bartolini & Gordon M. Bodnar, 1996. "Are Exchange Rates Excessively Volatile? And What Does "Excessively Volatile" Mean, Anyway?," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 72-96, March.
- Leonardo Bartolini & Gordon M. Bodnar, 1996. "Are exchange rates excessively volatile? And what does "excessively volatile" mean, anyway?," Research Paper 9601, Federal Reserve Bank of New York.
- Fabrice Capoen & Henri Sterdyniak & Pierre Villa, 1994.
"Indépendance des banques centrales, politiques monétaire et budgétaire : une approche stratégique,"
Revue de l'OFCE,
Presses de Sciences-Po, vol. 0(3), pages 65-102.
- Henri Sterdyniak & Pierre Villa & Fabrice Capoen, 1994. "Indépendance des banques centrales, politiques monétaire et budgétaire : une approche stratégique," Revue de l'OFCE, Programme National Persée, vol. 50(1), pages 65-102.
- Martin, Philippe, 1998.
"The Exchange Rate Policy of the Euro: A Matter of Size?,"
Journal of the Japanese and International Economies,
Elsevier, vol. 12(4), pages 455-482, December.
- Martin, Philippe, 1997. "The Exchange Rate Policy of the Euro: A Matter of Size?," CEPR Discussion Papers 1646, C.E.P.R. Discussion Papers.
- Philippe Martin, 1997. "The Exchange Rate Policy of the Euro: a Matter of Size?," Working Papers 1997-06, CEPII research center.
- Pesaran, B & Robinson, G, 1993. "The European Exchange Rate Mechanism and the Volatility of the Sterling-Deutschemark Exchange Rate," Economic Journal, Royal Economic Society, vol. 103(421), pages 1418-31, November.
- Agnès Bénassy-Quéré & Benoît Mojon & Jean Pisani-Ferry, 1997. "The Euro and Exchange Rate Stability," Working Papers 1997-12, CEPII research center.
- Y. K. Tse, 1998. "The conditional heteroscedasticity of the yen-dollar exchange rate," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(1), pages 49-55.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Francesco Saraceno).
If references are entirely missing, you can add them using this form.