Exchange Rate Uncertainty and the Microeconomic Benefits of Emu

Stockholm School of Economics Working Paper Series in Economics and Finance No. 127

Posted: 16 Jan 1997

See all articles by Richard Friberg

Richard Friberg

Stockholm School of Economics - Department of Economics

Anders Vredin

Sveriges Riksbank; Stockholm School of Economics

Date Written: September 1996

Abstract

This paper attempts to review the argument that EMU leads to benefits from lower exchange rate uncertainty. Two questions are addressed. First, there is the microeconomic question of how exchange rate uncertainty affects firms. Second, there is the macroeconomic question of how EMU affects uncertainty. Most of the paper is devoted to the first question. For instance, we study correlations between exchange rates on the one hand and stock prices and output prices on the other. The following facts speak against the idea that EMU will be beneficial for Swedish firms: firms can adjust to exchange rate uncertainty, for instance by pricing-to-market; exchange rate changes may work as "automatic stabilizers;" there is no strong empirical evidence that exchange rate uncertainty hampers trade, investment or growth; and important Swedish trading partners, like the U.S., the U.K. and Denmark, are not likely to participate in the monetary union in the near future. For EMU speak the facts that exchange rate uncertainty stems from policy uncertainty, which may be lower inside EMU; that EMU may lower protectionist pressures; and, in particular, that it is very hard for firms to hedge against total economic exchange rate risk (as opposed to mere transaction risk).

JEL Classification: F20, F33

Suggested Citation

Friberg, Richard and Vredin, Anders, Exchange Rate Uncertainty and the Microeconomic Benefits of Emu (September 1996). Stockholm School of Economics Working Paper Series in Economics and Finance No. 127. Available at SSRN: https://ssrn.com/abstract=4564

Richard Friberg (Contact Author)

Stockholm School of Economics - Department of Economics ( email )

P.O. Box 6501
Sveavagen 65
S-113 83 Stockholm
Sweden
+46 8 736 9645 (Phone)
+46 8 720 7752 (Fax)

Anders Vredin

Sveriges Riksbank ( email )

SE-103 37 Stockholm
Sweden
+46 8 787 0493 (Phone)
+46 8 210 531 (Fax)

Stockholm School of Economics ( email )

P.O. Box 6501
Stockholm
SWEDEN

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