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Exchange Rate Uncertainty and the Microeconomic Benefits of EMU

  • Friberg, Richard

    ()

    (Department of Economics)

  • Vredin, Anders

    ()

    (Department of Economics)

This paper attempts to review the argument that EMU leads to benefits from lower exchange rate uncertainty. Two questions are addressed. First, there is the microeconomic question of how exchange rate uncertainty affects firms. Second, there is the macroeconomic question of how EMU will be beneficial for Swedish firms: firms can adjust to exchange rate uncertainty, for instance by pricing-to-market; exchange rate changes may work as "automatic stabilizers"; there is no strong empirical evidence that trading partners, like the U.S., the U.K. and Denmark, are not likely to participate in the monetary union in the near future. For EMU speak the facts that exchange rate uncertainty stems from policy uncertainty, which may be lower inside EMU; that EMU may lower protectionist pressures; and, in particular, that it is very hard for firms ot hedge against total economic exchange rate risk (as opposed to mere transaction risk).

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Paper provided by Stockholm School of Economics in its series SSE/EFI Working Paper Series in Economics and Finance with number 127.

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Length: 57 pages
Date of creation: Sep 1996
Date of revision:
Publication status: Forthcoming in Swedish Economic Policy Review
Handle: RePEc:hhs:hastef:0127
Contact details of provider: Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
Phone: +46-(0)8-736 90 00
Fax: +46-(0)8-31 01 57
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  1. Clas Wihlborg, 1994. "EMU—Economic Substance or Political Symbolism?," The World Economy, Wiley Blackwell, vol. 17(5), pages 651-661, 09.
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