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The impact of exchange rate volatility on trade integration among North and South Mediterranean countries

  • Sabri, Nidal Rachid
  • Peeters, Marga
  • Abulaben, Diama K.

The volatility of exchange rates leads to a reduction of international trade volumes, especially in emerging economies including the South Mediterranean countries. This study discusses the impact of exchange rates on bilateral South- North trade flows, which comes timely after the increased volatility between the Euro and Arab national currencies during the last few years and after the global financial crisis of 2008 that led to a sharp reduction at that time. We investigate the impact of exchange rate volatility on trade using monthly time series for the last ten years from 2000 up to 2011. By means of a Vector Auto Regression model with eXogenous variables (VARX) we estimate the reactions of bilateral exports and imports in response to exchange rate fluctuations between South and North Mediterranean economies. A sample of three South Arab countries is selected including Egypt, Jordan, and Morocco. Causality tests are conducted to examine the hypotheses. Our results show that the exports of goods from Egypt to the European Union decreases in comparison with the baseline by about 3% in case of an appreciation of 10% of the Egyptian pound vis-à-vis the euro, while the imports of Egypt from the EU increase by almost 10%. Also for Morocco, the imports from the EU react much stronger than the exports to the EU to a similar size appreciation of the Moroccan dirham. Jordan is less import-dependent, though reacts strongly in terms of exports if its dollar-pegged currency appreciates vis-à-vis the euro. Finally, we can conclude that the actual exchange rate changes are quite high.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 38080.

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Date of creation: 27 Mar 2012
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Handle: RePEc:pra:mprapa:38080
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  7. Montero Luque, Inmaculada Maria & Peeters, Marga, 2009. "Euro-Mediterranean Process - Union for the Mediterranean: Macroeconomic and financial developments during the global crisis at the southern rim of the Mediterranean," MPRA Paper 23858, University Library of Munich, Germany, revised Jul 2010.
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  17. Magda Kandil & Nazire Nergiz Dincer, 2008. "A comparative analysis of exchange rate fluctuations and economic activity: The cases of Egypt and Turkey," International Journal of Development Issues, Emerald Group Publishing, vol. 7(2), pages 136-159, October.
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  19. Marga Peeters & Nidal R. Sabri, 2012. "INTERNATIONAL FINANCIAL INTEGRATION OF SOUTH-MEDITERRANEAN ECONOMIESA bird's-eye view," RSCAS Working Papers 2012/33, European University Institute.
  20. Mustapha Kamel Nabli & Marie-Ange Veganzones-Varoudakis, 2004. "How does exchange rate policy affect manufactured exports in MENA countries?," Applied Economics, Taylor & Francis Journals, vol. 36(19), pages 2209-2219.
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