EMU and the Stability and Volatility of Exchange Rates
Mikael Bask and
Xavier de Luna
No 4A.2, CeNDEF Workshop Papers, January 2001 from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance
"Do countries that do not participate in the Economic and Monetary Union, EMU, have currencies that are less stable, and therefore more sensitive to shocks to the economy, than countries that participate in the EMU? Does a membership in the European Union, EU, make any difference for countries not included in the EMU? In order to answer these questions, the dynamics of a large number of exchange rates is investigated. The stability of a dynamical system can be described by computing the Lyapunov exponents, where the largest exponent and the sum of all exponents are of particular interest. For instance, the sum is a measure of speed of convergence of two different trajectories of the system. Hence, for a non-chaotic dissipative system, the closer the sum is to zero the more unstable the system is. Thus, the Lyapunov exponents for the exchange rates are estimated, and it is investigated whether these exponents have changed during the launch of the common European currency. Moreover, it has been claimed that a membership in the EMU will reduce the size and frequency of the shocks to the economy. Therefore, structural changes in the volatility of the exchange rates is another focus of interest.
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