Currency Unification and Exchange Rate Uncertainty, Essay Example

Financial crisis has been speculated by investors worldwide.  It has also been suggested that exchange rates are the cause of economic shocks and as a way to adjust to economic shocks.  In fact, it is the primary reason why the European Commission formed the monetary union.  (Coleman)  The European Monetary Union was established in order to increase the economic and social links across the globe.  (Hellwell, 1998) The question remains, however, if the Economic and Monetary Union decreased exchange rate uncertainty for non-member countries too, such as Denmark during the years prior to their establishment. In order to analyze this question, a graph of the $/Deutschmark volatility in the years prior to the establishment of the Economic and Monetary Union from 1992-1999 was formulated.  In addition, a graph of the $/euro rate from the years 1999 till 2011 was made.

As seen in Figure 1, there is a slight increase in the rate from 1992 to 1993, and then it decreases.  There is a notable increase in the exchange rate until 1996, where is steadily increases until 1999.  In order to see if there was a significant change in the rates, the monthly standard deviations for Denmark were established (Table 1).  After the establishment of the European Commission in 1999, there is a dramatic increase in the Euro exchange rate from 2000 to 2011.  In order to specifically find out what is driving the increases in the exchange rate, the financial markets must be analyzed.