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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.
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

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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    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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