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Exchange-rate volatility is a problem for trade … especially when financial development is low
The increasing volatility of exchange rates after the fall of the Bretton Woods agreements has been a constant source of concern for both policymakers and academics. Developed countries fought hard in the 1980s to limit US dollar fluctuation (one thinks of the Plaza and Louvre’s agreements, respectively in 1985 and 1987), and some European countries took an even more radical decision by giving up their national currency for the euro in 1999. The underlying intuition is simple: exchange-rate risk increases transaction costs and reduces the gains to international trade. Surprisingly, macroeconomic evidence of the ... (full story)