Keywords: trade integration, international trade flows, exports, imports, Egypt, Jordan, Morocco, exchange rates, exchange rate volatility, international finance, financial integration, European Union
The impact of exchange rate volatility on trade integration among North and South Mediterranean countries
Timely after the increased exchange rate volatility caused by the global financial crisis, the Arab Spring and European sovereign debt crisis, this article investigates its impact on trade flows. With monthly data from 2000 up to 2011 we estimate by means of a vector auto regression model with eXogenous (VARX) variables the responses of bilateral exports and imports to exchange rate fluctuations between South and North Mediterranean economies. Our results show that the exports of goods from Egypt to the European Union decrease significantly in case of an appreciation of the Egyptian pound vis–à–vis the Euro, while the imports of Egypt from the EU increase to an even larger extent. The same results hold for Morocco, in case of a similar size appreciation of its domestic currency. Jordan is less import–dependent. We conclude that the impact of exchange rate volatility on trade is quite high.