EMU and the Stability and Volatility of Foreign Exchange: Some Empirical Evidence
How has the European monetary integration, with the creation of the EMU, affected the stability and volatility of foreign exchange? In order to answer this question, stability and volatility measures are defined and calculated. We then use these to investigate the changes in the stability and volatility of 16 European currencies, and in the volatility of the shocks to these currencies. The stability measures are based on smooth Lyapunov exponents, while the volatility measures utilize the variances. The results indicate that when most of the currencies become more stable, the majority also become less volatile. For example, following the agreement of the Maastricht Treaty most currencies became more stable and less volatile, whereas they became less stable and more volatile when the Danish public voted against the treaty. Finally, there is no empirical support for the view that a decision to step aside from a closer monetary collaboration has a negative effect on the stability of the currency.
|Date of creation:||01 Nov 2001|
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