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Volatility and the Euro: an Irish perspective

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  • Cotter, John

Abstract

With Ireland joining the Euro, exchange rate risk between participating states is gone. However, as is known, this new currency will continue to face exchange rate risk, and the general reduction of volatility on a day to day basis for Irish economic agents neglects to take account of possible extreme problems with the Euro. In this paper we will see that even though the Euro is a managed (irrevocably fixed) system, trade between Ireland and non-members, most notably the US, involves two separate currencies. This trade will require currency trading, leading to the possibility of large downside exposure to exchange rate risk for Irish exporters. In order to determine the extent to which the currencies can fluctuate, this paper examines exchange rate volatility using an Extreme Value approach. A number of different volatility scenarios are offered based on extrapolation of different exchange rate regimes under two broad headings, floating and managed. Using these headings, a number of actual systems are analysed including the ERM, the Snake in the Tunnel and Bretton Woods.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3535.

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Date of creation: 2000
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Handle: RePEc:pra:mprapa:3535

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  1. Maurice Obstfeld., 1993. "Risk-Taking, Global Diversification, and Growth," Center for International and Development Economics Research (CIDER) Working Papers C93-016, University of California at Berkeley.
  2. Jeffrey D. Sachs & Andrew Warner, 1995. "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 1-118.
  3. Hols, Martien C A B & de Vries, Casper G, 1991. "The Limiting Distribution of Extremal Exchange Rate Returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(3), pages 287-302, July-Sept.
  4. Flood, Robert P & Rose, Andrew K, 1998. "Understanding Exchange Rate Volatility Without the Contrivance of Macroeconomics," CEPR Discussion Papers 1944, C.E.P.R. Discussion Papers.
  5. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
  6. Flood, R.P. & Rose, A.K., 1992. "Fixing Exchange Rates: A Virtual Quest for Fundamentals," Papers 529, Stockholm - International Economic Studies.
  7. Phillip Kearns & Adrian Pagan, 1997. "Estimating The Density Tail Index For Financial Time Series," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 171-175, May.
  8. Lane, P & Honohan, P, 1999. "Pegging To The Dollar And The Euro," Trinity Economics Papers 996, Trinity College Dublin, Department of Economics.
  9. Corsetti, G. & Pesenti, P. & Roubini, N., 1998. "What Caused the Asian Currency and Financial Crisis?," Papers 343, Banca Italia - Servizio di Studi.
  10. Koedijk, C.G. & Kool, C.J.M., 1994. "Tail estimates and the ems target zone," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3108705, Tilburg University.
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Cited by:
  1. Rodney Thom & Brendan Walsh, 2001. "The Effect of a Common Currency on Trade - Ireland before and after the Sterling Link," Working Papers 200110, School Of Economics, University College Dublin.

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