The Weakness of the Euro: Is it Really a Mystery?
AbstractThis chapter addresses the weakness of the euro against the US dollar and the yen since its launch in 1999. The report stresses the effects on the euro of a dramatic decline in the demand for base money which probably reflected a flight of black money from within the euro countries as well as of deutschmarks returning from Eastern Europe and other parts of the world. As the ECB absorbed the fall in the demand for base money at given interest rates by changing the composition of its broad money aggregate M3, without changing its size, the effect on the exchange rate was very similar to a sterilised intervention of the same size. Measured against the trend, the decline in the demand for base money was in the order of q90 billion over the last few years until October 2001, enough to fully explain the euro weakness in quantitative terms. Apart from these changes in the demand for currency, macroeconomic factors have also contributed to the weakness of the euro, which may be seen as a reflection of dollar strength in the late 1990s. Dollar appreciation was initially driven by high consumption and investment demand due to expectations of a strong US advantage in growth and productivity. After doubts about the persistence of this advantage towards the end of 2000, the euro stopped depreciating, but remained weak, perhaps reflecting market pessimism about Europe’s ability to sustain its own growth independently of the United States. It was precisely in this period that the movements in currency demand mentioned above may have become stronger.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Ifo Institute for Economic Research at the University of Munich in its journal CESifo Forum.
Volume (Year): 2002 (2002)
Issue (Month): CESIFOFORUMSPECIAL (04)
Other versions of this item:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Martin D. D. Evans & Richard K. Lyons, 2002.
"Order Flow and Exchange Rate Dynamics,"
Journal of Political Economy,
University of Chicago Press, vol. 110(1), pages 170-180, February.
- Evans, Martin D. & Lyons, Richard K., 1999. "Order Flow and Exchange Rate Dynamics," Research Program in Finance, Working Paper Series qt0dh1c16w, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley.
- Martin D. D. Evans and Richard K. Lyons., 1999. "Order Flow and Exchange Rate Dynamics," Research Program in Finance Working Papers RPF-288, University of California at Berkeley.
- Martin D.D. Evans & Richard K. Lyons, 1999. "Order Flow and Exchange Rate Dynamics," NBER Working Papers 7317, National Bureau of Economic Research, Inc.
- Francisco Maeso-Fernandez & Chiara Osbat & Bernd Schnatz, 2001.
"Determinants of the euro real effective exchange rate: a BEER/PEER approach,"
- Francisco Maeso-Fernandez & Chiara Osbat & Bernd Schnatz, 2002. "Determinants of the Euro Real Effective Exchange Rate: A BEER/PEER Approach," Australian Economic Papers, Wiley Blackwell, vol. 41(4), pages 437-461, December.
- Maeso-Fernandez, Francisco & Osbat, Chiara & Schnatz, Bernd, 2001. "Determinants of the euro real effective exchange rate: a BEER/PEER approach," Working Paper Series 0085, European Central Bank.
- Gabriele Galati & Kostas Tsatsaronis, 2001. "The impact of the euro on Europe's financial markets," BIS Working Papers 100, Bank for International Settlements.
- Enrique Alberola & Susana G. Cervero & Humberto Lopez & Angel Ubide, 2000.
"Global Equilibrium Exchange Rates: Euro, Dollar, "Ins," "Outs," and Other Major Currencies in a Panel Cointegration Framework,"
Econometric Society World Congress 2000 Contributed Papers
0051, Econometric Society.
- Susana Garcia Cervero & J. Humberto Lopez & Enrique Alberola Ila & Angel J. Ubide, 1999. "Global Equilibrium Exchange Rates - Euro, Dollar, "Ins," "Outs," and Other Major Currencies in a Panel Cointegration Framework," IMF Working Papers 99/175, International Monetary Fund.
- Vincent Koen & Laurence Boone & Alain de Serres & Nicola Fuchs, 2001. "Tracking the Euro," OECD Economics Department Working Papers 298, OECD Publishing.
- Bas Aarle & Michael Boss & Jaroslava Hlouskova, 2000. "Forecasting the Euro exchange rate using vector error correction models," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 136(2), pages 232-258, June.
- McCauley, R.N., 1997.
"The Euro and the Dollar,"
Princeton Essays in International Economics
205, International Economics Section, Departement of Economics Princeton University,.
- Helmut Stix, 2001. "Survey Results about Foreign Currency Holdings in Five Central and Eastern European Countries," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 2(3), pages 41-48, 02.
- Enrique Alberola & Susana Garcia-Cervero & Humberto López & Angel Ubide, 2005. "Quo vadis Euro?," International Finance 0507004, EconWPA.
- Martin D. D. Evans & Richard K. Lyons, 2001. "Portfolio Balance, Price Impact, and Secret Intervention," NBER Working Papers 8356, National Bureau of Economic Research, Inc.
- Jan Hansen & Werner Roeger, 2000. "Estimation of real equilibrium exchange rates," European Economy - Economic Papers 144, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
- Hans-Werner Sinn & Frank Westermann, 2001. "The Deutschmark in Eastern Europe, Black Money and the Euro: On the Size of the Effect," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 2(3), pages 35-40, 02.
- Chinn, Menzie D & Alquist, Ron, 2000. "Tracking the Euro's Progress," International Finance, Wiley Blackwell, vol. 3(3), pages 357-73, November.
- Hans-Werner Sinn & Frank Westermann, 2001. "Why Has the Euro Been Falling?," CESifo Working Paper Series 493, CESifo Group Munich.
- Guy Meredith, 2001. "Why Has the Euro Been So Weak?," IMF Working Papers 01/155, International Monetary Fund.
- Hans-Werner Sinn, 2001. "Flight from the Old Euro-Area Currencies," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 2(4), pages 44-47, 02.
- Clostermann, Jörg & Schnatz, Bernd, 2000. "The determinants of the euro-dollar exchange rate: synthetic fundamentals and a non-existing currency," Discussion Paper Series 1: Economic Studies 2000,02, Deutsche Bundesbank, Research Centre.
- repec:fth:eeccco:144 is not listed on IDEAS
- Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
- Francis Breedon & Francesca Fornasari, 2001. "The Impact of Euro Notes and Coins," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 2(3), pages 49-51, October.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Klaus Wohlrabe).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.