Real Exchange Rate Volatility, Economic Growth and the Euro

Real Exchange Rate Volatility, Economic Growth and the Euro

This paper studies the impact of real effective exchange rate volatility on economicgrowth as well as the euro’s impact on real effective exchange rate volatility. We firstshow that after a plausible endogeneity correction, real effective exchange rate volatilityis negatively associated with growth in a 1980~2011 panel of the OECD (Organizationfor Economic Cooperation and Development) countries. A one standard deviationvolatility decrease is associated with a two percentage points growth increase. Second,we find that the euro adoption was associated with a decline of 0.4 standard deviations inlong-run real effective exchange rate volatility before the Great Recession in 2008~2009. Moreover, while the Great Recession increased real effective exchange rate volatility by38~189% of the sample mean for the countries outside the eurozone, the real effectiveexchange rate of the euro adopters were almost completely insulated. We conclude thatreal effective exchange rate stability may be growth-enhancing in the OECD countriesand that the euro have played a growth-enhancing role at least before the recent eurozonedebt crisis.

This paper studies the impact of real effective exchange rate volatility on economicgrowth as well as the euro’s impact on real effective exchange rate volatility. We firstshow that after a plausible endogeneity correction, real effective exchange rate volatilityis negatively associated with growth in a 1980~2011 panel of the OECD (Organizationfor Economic Cooperation and Development) countries. A one standard deviationvolatility decrease is associated with a two percentage points growth increase. Second,we find that the euro adoption was associated with a decline of 0.4 standard deviations inlong-run real effective exchange rate volatility before the Great Recession in 2008~2009. Moreover, while the Great Recession increased real effective exchange rate volatility by38~189% of the sample mean for the countries outside the eurozone, the real effectiveexchange rate of the euro adopters were almost completely insulated. We conclude thatreal effective exchange rate stability may be growth-enhancing in the OECD countriesand that the euro have played a growth-enhancing role at least before the recent eurozonedebt crisis.