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Effect of exchange rate risk on intra-EC trade

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The smooth development of the EMS towrds an exchange rate system with fixed exchange rates among its member countries recently came to an abrupt (temporary) end. This raises the question whether exchange rate volatility is damaging to international trade. So far, it has remained an open empirical question whether exchange rate variability has the presumed negative effects. This article shows that the exports of five countries participating in the ERM have substantially benefited from the diminische exchange rate risk in the period from 1979 up to and including 1990. Contrary to former empirical studies, which deal with figures for total trade or total trade or total manufactures, the analysis here has been conducted for exports broken down by type of product. The study suggests that a more disaggregated analysis, with respect to products or sectors, might be a fruitful way of identifying the effects of exchange rate volatility on international trade.

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Stokman, A.C.J. Effect of exchange rate risk on intra-EC trade. De Economist 143, 41–54 (1995).

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