Economic Integration, Uncertainty, and Trade – The European Experience

In monetary unions of the European type the reduction in exchange rate uncertainty is not able to explain the differences in the economic performance of member countries. It is shown that traditionally unstable countries like Portugal and Ireland benefit significantly from a decrease in inflation and interest rate uncertainty while traditionally stable countries do not. The reduction in political uncertainty defined as the probability to become a full member of the monetary union contributes to a more stable development in inflation and interest rates in accession countries. For countries outside the monetary union the perspective to join shortens the adjustment period available for structural economic reforms. Corresponding Author Prof. Dr. Volbert Alexander Department of Economics and Business Administration University of Giessen Licher Str. 62 D-35394 Giessen Germany e-mail: [email protected] phone: +49-641-9922170 fax: +49-641-9922179