Exchange Rate Volatility and Euro Area Imports

33 Pages Posted: 27 Feb 2003

See all articles by Robert Anderton

Robert Anderton

European Central Bank (ECB)

Frauke Skudelny

European Central Bank (ECB)

Date Written: May 2001

Abstract

This paper estimates an import demand function for the euro area vis-a-vis its main extra-area trading partners which takes into account the possible impact of both intra- and extra-euro area exchange rate uncertainty. Our theoretical model captures various mechanisms by which exchange rate volatility may influence the demand for extra-euro area imports. If importers are risk averse, the model predicts not only a negative effect of exchange rate volatility, but also substitution possibilities between extra- and intra-area imports due to differences in the degree of extra- and intra-area exchange rate volatility. Using quarterly data for the past eleven years, panel estimates suggest that extra-area exchange rate volatility may have decreased extra-euro area imports by around 10 per cent. Finally, we also provide some limited evidence that differences in extra- and intra-area exchange rate volatility may have resulted in substitution between extra- and intra-area imports.

Keywords: Import demand; exchange rate uncertainty; monetary union

JEL Classification: F15, F31

Suggested Citation

Anderton, Robert and Skudelny, Frauke, Exchange Rate Volatility and Euro Area Imports (May 2001). Available at SSRN: https://ssrn.com/abstract=356121

Robert Anderton (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Frauke Skudelny

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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