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Why the Euro Will Rival the Dollar

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Author Info

  • Menzie Chinn

    () (University of Wisconsin)

  • Jeffrey Frankel

    () (Harvard University)

Abstract

The euro has arisen as a credible eventual competitor to the dollar as leading international currency, much as the dollar rose to challenge the pound 70 years ago. This paper uses econometrically-estimated determinants of the shares of major currencies in the reserve holdings of the world’s central banks. Significant factors include: size of the home country, rate of return, and liquidity in the relevant home financial center (as measured by the turnover in its foreign exchange market). There is a tipping phenomenon, but changes are felt only with a long lag (we estimate a weight on the preceding year’s currency share around .9). The equation correctly predicts out-of-sample a (small) narrowing in the gap between the dollar and euro over the period 1999-2007. This paper updates calculations regarding possible scenarios for the future. We exclude the scenario where the United Kingdom joins euroland. But we do take into account of the fact that London has nonetheless become the de facto financial center of the euro, more so than Frankfurt. We also assume that the dollar continues in the future to depreciate at the trend rate that it has shown on average over the last 20 years. The conclusion is that the euro may surpass the dollar as leading international reserve currency as early as 2015.

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File URL: http://www.panoeconomicus.rs/casopis/jedanaestibroj/why%20the%20euro%20will%20rival%20the%20dollar.pdf
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Bibliographic Info

Article provided by Savez ekonomista Vojvodine, Novi Sad, Serbia in its journal Panoeconomicus.

Volume (Year): 55 (2008)
Issue (Month): 3 (September)
Pages: 255-278
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:voj:journl:v:55:y:2008:i:3:p:255-278

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Web page: http://www.panoeconomicus.rs/

For corrections or technical questions regarding this item, or to correct its listing, contact: (Ivana Horvat).

Related research

Keywords: Foreign exchange market; Euro; Dollar; Reserve currency;

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Cited by:
  1. Christoph Fischer, 2011. "Currency blocs in the 21st century," Globalization and Monetary Policy Institute Working Paper 87, Federal Reserve Bank of Dallas.
  2. Jean Pisani-Ferry & Jérémie Cohen-Setton, 2008. "Asia-Europe: the third link," European Economy - Economic Papers 352, Directorate General Economic and Monetary Affairs, European Commission.
  3. John Ryan, 2009. "China and the Global Roles of Currencies," Working Papers 2009.8, International Network for Economic Research - INFER.
  4. Joshua Aizenman & Nancy Marion, 2009. "Using Inflation to Erode the U.S. Public Debt," NBER Working Papers 15562, National Bureau of Economic Research, Inc.
  5. Christian Thimann, 2009. "Global roles of currencies," Working Paper Series 1031, European Central Bank.
  6. Agnes Benassy-Quere & Jean Pisani-Ferry, 2011. "Quel systeme monetaire international pour une economie mondiale en mutation rapide ?," Working Papers 2011-04a, CEPII research center.
  7. Ryan, John, 2009. "China and the Reserve Currency Question," MPRA Paper 18218, University Library of Munich, Germany.
  8. Malliaris, A.G. & Malliaris, Mary, 2011. "Are oil, gold and the euro inter-related? time series and neural network analysis," MPRA Paper 35266, University Library of Munich, Germany.

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