The Benefits of economic integration and monetary unions: the negative impact on growth of export portfolio volatility

The elimination of exchange rate volatility among union members is widely considered as one of the main advantages of economic integration and, specifically, of monetary unions. Nonetheless, few papers find evidence of a significant impact of (bilateral) exchange rate volatility on growth. We argue that bilateral exchange rate volatility is an insufficient measure of trading risk since it does not include the volatility induced by trading partners. By devising an “export portfolio risk approach” we find that the variance of a portfolio including exchange rates with trading partners weighted for their relative export shares has significant impact on levels and growth of per capita income after controlling for physical and human capital, institutional and macroeconomic variables, access to ICT and other variables traditionally considered in growth estimates. The effect is robust to sensitivity analysis and to changes in sample composition. Our results sugest that economic integration and monetary unions by reducing export portfolio risk imported from neighbouring partners may have significant effects on growth.