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

Philippe Martin ()

No 1646, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Country Size; European Monetary Integration; Exchange Rate Instability (search for similar items in EconPapers)
JEL-codes: F33 F41 F42 (search for similar items in EconPapers)
Date: 1997-05
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Related works:
Journal Article: The Exchange Rate Policy of the Euro: A Matter of Size? (1998) Downloads
Working Paper: The Exchange Rate Policy of the Euro: a Matter of Size? (1997) Downloads
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