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Evolution of the Trans-Atlantic exchange rate before and after the birth of the Euro and policy implications

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  • Heng Chen
  • Dietrich Fausten
  • Wing-Keung Wong

Abstract

The establishment of the Euro could present a challenge to the hegemony of the US Dollar as the predominant international currency. The fact that the unipolar US Dollar dominated international monetary system can be unstable in the presence of large shocks presents an opportunity for the Euro to promote systemic stability. The present study pursues this conjecture by exploring with cointegration and Error Correction Method techniques, the interdependence between the dynamics of the Dollar/Euro exchange rate and economic fundamentals in the context of a monetary exchange rate model. Our results suggest that both short-run (price stickiness) and long-run (secular growth) fundamentals affect the exchange rate path. These findings support a relatively broad-based policy approach to promote the collective economic interest of the EU-zone. To the extent that such policies succeed in strengthening and stabilizing the Euro-zone economy, they are likely to buttress and possibly accelerate the internationalization of the Euro.

Suggested Citation

  • Heng Chen & Dietrich Fausten & Wing-Keung Wong, 2011. "Evolution of the Trans-Atlantic exchange rate before and after the birth of the Euro and policy implications," Applied Economics, Taylor & Francis Journals, vol. 43(16), pages 1965-1977.
    • Handle: RePEc:taf:applec:v:43:y:2011:i:16:p:1965-1977
    DOI: 10.1080/00036840902845509
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    Cited by:

    1. Nguyen Huu Hau & Tran Trung Tinh & Hoa Anh Tuong & Wing-Keung Wong, 2020. "Review of Matrix Theory with Applications in Education and Decision Sciences," Advances in Decision Sciences, Asia University, Taiwan, vol. 24(1), pages 28-69, March.
    2. Claudio, Morana, 2015. "The US$/€ exchange rate: Structural modeling and forecasting during the recent financial crises," Working Papers 321, University of Milano-Bicocca, Department of Economics, revised 28 Dec 2015.
    3. Kai-Yin Woo & Chulin Mai & Michael McAleer & Wing-Keung Wong, 2020. "Review on Efficiency and Anomalies in Stock Markets," Economies, MDPI, vol. 8(1), pages 1-51, March.
    4. Baillie, Richard T. & Cho, Dooyeon, 2016. "Assessing Euro crises from a time varying international CAPM approach," Journal of Empirical Finance, Elsevier, vol. 39(PB), pages 197-208.
    5. Muhammad Arshad Khan & Saima Nawaz, 2018. "Does Pak-Rupee Exchange Rate Respond to Monetary Fundamentals? A Structural Analysis," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 57(2), pages 175-202.
    6. Andreas Andrikopoulos & Aristeidis Samitas & Konstantinos Kougepsakis, 2014. "Volatility transmission across currencies and stock markets: GIIPS in crisis," Applied Financial Economics, Taylor & Francis Journals, vol. 24(19), pages 1261-1283, October.

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