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The impact of exchange rate fluctuations on international trade has
long been a major concern for policy-makers. This is particularly the
case in Europe, where countries trade extensively with each other. The
ERM crisis that began in the summer of 1992 generated increased exchange
rate fluctuations and, therefore, renewed concerns about consequences
for trade inside the EU. In Discussion Paper No. 1041, Research Fellows André
Sapir and Axel Weber, and Khalid Sekkat assess the
likely impact of the exchange rate crisis on trade flows inside and
outside the EU. The analysis indicates the need to distinguish between
short-term oscillations (volatility) and medium-term fluctuations
(misalignment). The recent ERM crisis is likely to have had some
negative impact on trade within the region, but this impact is probably
quite small. No apparent link between trade volumes and exchange rate
volatility is found. But it is shown that the direction of
period-to-period exchange rate changes rather than their absolute size
appears to matter for trade flows. |