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The Anticipated and Concurring Effects of the EMU: Exchange Rate Volatility, Institutions and Growth

Bank of Finland Discussion Paper No. 15/2004

42 Pages Posted: 14 Dec 2004  

Michele Bagella

University of Rome, Tor Vergata - Faculty of Economics

Leonardo Becchetti

University of Rome, Tor Vergata - Faculty of Economics

Iftekhar Hasan

Gabelli School of Business, Fordham University; Bank of Finland

Date Written: September 2004

Abstract

Reduced exchange rate volatility and higher and less heterogeneous quality of institutional rules and macroeconomic policies are two of the main (anticipated and concurring) effects expected from a currency union. In this paper we measure the magnitude of these two effects on the Euro area countries, looking at real effective exchange rates (REER) and at different indicators of quality of institutional rules and macroeconomic policies (QIRMP). We find that the first effect is much stronger than the second when we compare relative changes on Euro area countries and the rest of the world in the relevant period. We further evaluate the impact of both effects on economic growth on a larger sample of countries. Our findings show that both have significant impact on levels (more robust) and on rates of growth (weaker) of per capita GDP.

Keywords: Real exchange rate, volatility, institutional rules, macroeconomic policy

JEL Classification: F15, F31

Suggested Citation

Bagella, Michele and Becchetti, Leonardo and Hasan, Iftekhar, The Anticipated and Concurring Effects of the EMU: Exchange Rate Volatility, Institutions and Growth (September 2004). Bank of Finland Discussion Paper No. 15/2004. Available at SSRN: https://ssrn.com/abstract=631522 or http://dx.doi.org/10.2139/ssrn.631522

Michele Bagella (Contact Author)

University of Rome, Tor Vergata - Faculty of Economics ( email )

Via Columbia n.2
Rome, rome 00100
Italy

Leonardo Becchetti

University of Rome, Tor Vergata - Faculty of Economics ( email )

Via Columbia, 2
I-00133 Rome
Italy

Iftekhar Hasan

Gabelli School of Business, Fordham University ( email )

Rose Hill Campus Bronx
New York, NY 10458
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

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