EMU Effects on International Trade and Investment

The partial effect of nominal exchange rate volatility on exports from each EMU member to the rest of the EMU is estimated on annual data for 1967-1997, using modern time series methods. The long run relations between exchange rate volatility and exports are mostly negative and in several cases insignificantly different from zero. Thus, these estimates do not provide much support for the hypothesis that the elimination of nominal exchange rate volatility will significantly increase trade within the EMU. However, the EMU will presumably lead to geographical concentration of production and therefore indirectly to increased trade within the EMU and – during a transitional stage – to increased foreign direct investment, both within the EMU and between the EMU and the rest of the world.