Exchange Rate Fluctuations, Trade and Asymmetric Shocks in the Economic and Monetary Union
The issue of shocks affecting participants in the Economic and Monetary Union (EMU) in Europe asymmetrically is an important concern of both economists and policy makers. The present paper focuses on the likelihood of asymmetric shocks in Europe originating from the impact of exchange rate fluctuations on trade. It identifies two necessary conditions for such asymmetric shocks to occur: exchange rate fluctuations should have different impacts across sectors and countries should have different industrial specialization. Using data of bilateral imports of the EMU members from other countries, this paper estimates the elasticity of trade to exchange rate changes for 42 industrial sectors. It finds that exchange rate fluctuations do indeed have different impacts across sectors. Examining the pattern of industrial specialization in Europe shows that there are non-negligible dissimilarities among members' industrial structure. The two conditions identified hold in Europe and the occurrence of asymmetric shocks within the euro area can be expected. Copyright Blackwell Publishing Ltd. 2005
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Volume (Year): 8 (2005)
Issue (Month): 1 (07)
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