Exchange Rate Volatility and Economic Growth in Eurozone Markets

Firms involved in foreign trade (exports and imports) are generally sensitive to fluctuations in the exchange rates and carefully take it into consideration while planning their future trading. In this paper, we study the inter-relationship between exchange rate volatility and economic growth in the Eurozone markets. Specifically, we study how volatility of a country’s foreign currency exchange rate affects economic development. For an economy that is heavily dependent on foreign trade, its overall economic productivity may be affected by fluctuation of its currency with the currencies of the trading partners. We investigate this relationship between the GDP growth rates of twenty Eurozone countries with the exchange rate volatility of thirteen developed countries. Our results indicate that GDP growth rates of most of the Eurozone countries are generally affected by exchange rate volatility of its trading partners. Most of these impacts are negative indicating that the GDP growth rates of the Eurozone countries decline with the volatility of the exchange rates of trading partners. The result is consistent with the findings of previous literature in this area. Our findings are important for the policymakers to consider in planning the management of their currencies to minimize the negative effect of exchange rate volatility.