SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

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 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 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 ot hedge against total economic exchange rate risk (as opposed to mere transaction risk).

Keywords: Exchange rate uncertainty; EMU; exchange rate exposure

JEL-codes: F20; F33

57 pages, September 1996

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Richard Friberg and Anders Vredin, 'Exchange Rate Uncertainty and the Microeconomic Benefits of EMU', Swedish Economic Policy Review

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