| Abstract: | This paper provides new evidence on the long-run relationship between imports and exchange-rate volatility in eight European countries. The period examined is 1973:2 through 1995:1. Cointegration analyses are based on Johansen's (1992, 1995) approach and robust single-equation methods. In conformity with theoretical considerations, the major results show that exchange-rate volatility has a significant negative effect on the volume of imports of six countries whereas for Greece and Sweden, it is positive and significant. These findings are reasonably robust in terms of measures of exchange-rate volatility, different estimation methods and membership in the European Exchange-rate Mechanism (ERM). Therefore, it can be argued that exchange-rate volatility will have significant effects on the allocation of resources by market participants and that policy-makers can no longer rely on an import demand with only conventional variables for long-term international trade planning, forecasting and policy formulation. |
