VOLUME VI
WINTER 1998

EXCHANGE RATES AND TRADE BALANCES IN THE EUROPEAN UNION
 
MANUEL CANTAVELLA
CELESTINO SUÁREZ

Universidad Jaume I e Instituto de Economía Internacional
ISMAEL FERNÁNDEZ
Universidad de Valencia e Instituto de Economía Internacional
 
This paper examines the long-run relationship between the trade balance and the real effective exchange rate of major European Union countries (Germany, France, the United Kingdom, Italy and Spain) over the period 1975-1997. The approach is based on the cointegration techniques proposed by Johansen (1988) and uses quarterly data. The empirical results indicate the existence of a positive relationship between these two variables, although the long-run effects are somewhat moderate. This fact might be reflecting the influence of intra-industry trade among industrialized countries. Therefore, variables other than price should be stressed with regard to the behaviour of the trade balance.
 
Keywords: monetary union, trade balance, real effective exchange rate, cointegration.

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