Chapter 11: Monetary Integration and Trade: What do we Know?
* Volker Nitsch 11.1 ENTRÉE What is the effect of monetary integration on international trade? About a decade ago, an informed answer to this question would have been: presumably positive, but negligibly small in magnitude. While exchange rate fluctuations were widely viewed (both in policy circles and among business people) as a major business risk that may seriously inhibit cross-border transactions, econometric evidence that exchange rate stability enhances trade remained surprisingly weak. Figure 11.1 provides an (admittedly rough) illustration of this (non-) result at a very aggregate level. As shown, there is essentially no visible relationship between the volatility of the 10 9 8 7 6 5 4 3 2 1 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 0 4 2 6 10 8 12 Note: World trade (circled line) is measured as the average of the volume of world exports and imports in trillions of 2000 US dollars (right scale). Volatility is measured as the unweighted average of the volatility of the real exchange rate of the countries in the Clark et al. (2004) sample. The dashed line includes the volatility of the transition economies starting in 1988. Source: Adapted from Clark et al. (2004). Figure 11.1 Exchange rate volatility and trade 257 M2619 - VOLZ PRINT.indd 257 02/06/2011 15:27 258 Regional integration, economic development and global governance average real effective exchange rate and the evolution of world trade. While the overall level of currency volatility...
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