Exchange Rate Volatility and Exports in the run-up to the EMU accession

According to theory of monetary integration, lower exchange rate variability is believed to be the main positive effect of a common currency. However, empirical studies do not confirm this negative and significant impact of exchange rate volatility on trade. In this report, we analyze the relationship between the exchange rate volatility and the export performance of Central and Eastern European non-euro EU countries: Poland, Czechia, Hungary, and Romania. We use monthly frequency data on export flows to the euro area and the European Union. The sample covers the period from 2000M1 till 2015M6 and we control for the financial crisis of 2008-2009 when exchange rate variability increased considerably. We measure exchange rate volatility using traditional standard deviation approach and GARCH models. The main hypothesis is verified using both aggregated data and sectoral trade data. The effects of euro exchange rate volatility on Polish trade are explored with more focus by estimating a series of vector error correction models and by assessing impulse-response functions. For the panel data estimation, we employ second generation dynamic panel cointegration model with PMG estimator. The results suggest that the elimination of the exchange rate volatility through euro adoption will not necessarily increase the export performance of the countries integrating with the euro area.