The Impact of Exchange Rate Volatility on Trade Integration Among North and South Mediterranean Countries

Abstract

The volatility of exchange rates leads to reduction of the international trade volume, mainly in the emerging economies in which all the Mediterranean South countries belong to. Thus, this study discussed the impact of exchange rate issue on South- North trading flow, which comes timely after increasing volatility between Euro and Arab national currencies during the last few years, and after the 2008 financial crisis which led to a sharp reduction of trading in 2008. Therefore, this paper investigates the impact of exchange rate volatility on trading between South- North parts, using monthly time series data for the last ten years from 2000 up to 2011. We use a Vector-Autoregressive Regression model with exogenous variables (VARX) in order to find the reactions of exports and import to point out the impact of the currencies on trade volume between North and South Mediterranean countries. A sample of three South Arab countries is selected including Egypt, Jordan, and Morocco. The causality test was conducted to examine the hypotheses. The study found that the exports of goods from the Egypt to the EU decreases in comparison with the baseline by about 3% as they have become more expensive. The imports from the EU, on the contrary, become cheaper. For Morocco, the increase in imports from the EU in reaction to a 10%-appreciation of the Moroccan dirham increases even by almost 20%. Jordan exports fall sharply in case of a 10% appreciation of the Jordan dinar vis-a-vis the euro. The exports seem less sensitive to an appreciation. Finally, we can conclude that the exchange rate changes can be quite high.