ABSTRACT
When economists talk about the benefits of a regional currency union, one of the first cabs off the rank is invariably the issue of exchange rate volatility and trade flows. This is probably because the exchange rate volatility and trade flow argument is, at least at first glance, fairly straightforward and easy to understand. The general premise is that risk-averse exporters trade less when faced with an increase in exchange rate volatility. Thus, exchange rate volatility is thought to reduce welfare; the logical policy implication is that any attempt to stabilise exchange rates will stimulate trade, with obvious benefits for the economy.
