Long-run and Short-run Effects of Exchange Rate Movements for Major EU Countries

Long-run and Short-run Effects of Exchange Rate Movements for Major EU Countries: Cointegration and Error-Correction Modeling

This paper examines the long-run and short- run effects of depreciation/devaluation for major European Union countries (Germany, France, the United Kingdom, and Italy) over the 1975-1997 period. The approach is based on cointegration techniques proposed by Johansen [1988] and uses quarterly data. The empirical results indicate the existence of a positive relationship between the exchange rate and the trade balance for each country although long-run effects are rather moderate. According to the short- run analysis, there is a finding of a J-curve for Italy and the United Kingdom. The costs of relinquishing individual exchange rates may be rather small for major EU countries. (JEL Classification: F31, F41)