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The Exchange Rate Policy of the Euro: a Matter of Size?

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  • Philippe Martin

Abstract

This paper analyses how country size affects exchange rate policy and volatility. A hump-shaped relation between exchange rate variability and the size of countries is generated in the theoretical model: exchange rate variability increases with country size for small countries, but then decreases for large countries. The paper finds that this theoretical prediction holds well for bilateral exchange rates of the OECD countries for the period 1980–95 as well as for a subsample of European exchange rates with respect to the dollar. The results suggest that dollar/euro volatility should be lower than the present dollar/Deutsche Mark volatility, but that the decrease may depend significatively on the size and composition of EMU.
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Suggested Citation

  • Philippe Martin, 1997. "The Exchange Rate Policy of the Euro: a Matter of Size?," Working Papers 1997-06, CEPII research center.
  • Handle: RePEc:cii:cepidt:1997-06
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    References listed on IDEAS

    as
    1. Philippe Martin, 1995. "Free-riding, convergence and two-speed monetary unification in Europe," Post-Print hal-03609273, HAL.
    2. Flood, Robert P. & Rose, Andrew K., 1995. "Fixing exchange rates A virtual quest for fundamentals," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 3-37, August.
    3. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
    4. Martin, Philippe, 1994. "Monetary policy and country size," Journal of International Money and Finance, Elsevier, vol. 13(5), pages 573-586, October.
    5. Cohen, Daniel, 1997. "How will the euro behave ?," CEPREMAP Working Papers (Couverture Orange) 9704, CEPREMAP.
    6. Persson, Torsten & Tabellini, Guido, 1996. "Monetary Cohabitation in Europe," American Economic Review, American Economic Association, vol. 86(2), pages 111-116, May.
    7. Martin, Philippe, 1995. "Free-riding, convergence and two-speed monetary unification in Europe," European Economic Review, Elsevier, vol. 39(7), pages 1345-1364, August.
    8. Canzoneri, Matthew B & Gray, Jo Anna, 1985. "Monetary Policy Games and the Consequences of Non-cooperative Behavior," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 547-564, October.
    9. Philippe Martin, 1994. "Monetary policy and country size," Post-Print hal-03393496, HAL.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    exchange rate policy; euro; european integration; game theory; shock; EMS; Economic policy;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • F02 - International Economics - - General - - - International Economic Order and Integration

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