Exchange Rate Volatility and Trade Flows in

Yıl 2015, Cilt: 1 Sayı: 1, 61 - 80, 01.06.2015

The Euro Area Zelha Altınkaya Fırat Bayır

Öz

This paper examines the euro area as an optimum currency area alongside the current financial crisis. In evaluating the effectiveness of the Eurozone’s currency club, this research measured the effects of 2008 financial crisis in the Eurozone by considering exchange rate volatility on trade flows between the United States and the Eurozone. The study employed a conditional autoregressive distributed lag model or bound testing as its empirical methodology, which verifies co-integration between variables and further differentiates the short and long run impacts. The selection of the appropriate model or the lag length is based on Schwarz Information Criterion and Akaike Information Criterion. The data is a quarterly time series data from 1999 to 2014, which provides enough observations for the time-series econometric model. The empirical findings revealed exports were more sensitive than imports to exchange rate volatility. The short run causality effects were generally minimal and the speed of recovery back to the macroeconomic equilibrium was higher in exports than imports. In definitive, the euro area is not a perfect example of a currency club as pointed out by the transfer of asymmetric shocks to members. However, this study recommends that future studies on exchange rate risk vis-à-vis trade be broken down at the level of trade flows into various economic activities or sectors. Testing for imports and exports as a whole, seems too vast to better appreciate and interpret results correctly

Anahtar Kelimeler

Exchange rate, exchange rate volatility, trade flows, euro, ARDL

Kaynakça

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