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

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  • Philippe Martin

    (CEPR - Center for Economic Policy Research)

Abstract

This paper analyzes 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 in the period between 1980 and 1995 as well as for a subsample of European exchange rates with respect to the dollar. The results suggest that the dollar/euro volability may be lower than the present dollar/DM volatility.

Suggested Citation

  • Philippe Martin, 1998. "The Exchange Rate Policy of the Euro: A Matter of Size?," Post-Print hal-03417538, HAL.
    • Handle: RePEc:hal:journl:hal-03417538
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    References listed on IDEAS

    as
    1. Flood, Robert P. & Rose, Andrew K., 1995. "Fixing exchange rates A virtual quest for fundamentals," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 3-37, August.
    2. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
    3. Cohen, Daniel, 1997. "How will the euro behave ?," CEPREMAP Working Papers (Couverture Orange) 9704, CEPREMAP.
    4. Persson, Torsten & Tabellini, Guido, 1996. "Monetary Cohabitation in Europe," American Economic Review, American Economic Association, vol. 86(2), pages 111-116, May.
    5. Martin, Philippe, 1994. "Monetary policy and country size," Journal of International Money and Finance, Elsevier, vol. 13(5), pages 573-586, October.
    6. Martin, Philippe, 1995. "Free-riding, convergence and two-speed monetary unification in Europe," European Economic Review, Elsevier, vol. 39(7), pages 1345-1364, August.
    7. Canzoneri, Matthew B & Gray, Jo Anna, 1985. "Monetary Policy Games and the Consequences of Non-cooperative Behavior," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 547-564, October.
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    More about this item

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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