Discussion Paper Details

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Title: The Exchange Rate Policy of the Euro: A Matter of Size?

Author(s): Philippe Martin

Publication Date: May 1997

Keyword(s): Country Size, European Monetary Integration and Exchange Rate Instability

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Martin, P. 1997. 'The Exchange Rate Policy of the Euro: A Matter of Size?'. London, Centre for Economic Policy Research.