The Indeterminacy of the Euro Conversion Rates. Why it Matters and How it can be Solved

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The Indeterminacy of the Euro Conversion Rates. Why it Matters and How it can be Solved

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De Grauwe, Paul

Abstract

The Maastricht Treaty and the Madrid Council decision severely restrict the choice of the euro conversion rates. In practical terms the authorities can only select the Ecu rates prevailing in the market the day before conversion. The market will lack a fixed point, however, so that infinite possible Ecu rates (and thus euro rates) could emerge. This indeterminacy problem is not solved by announcing fixed bilateral conversion rates in advance. The indeterminacy of the euro rates will spill over into an indeterminacy of the exchange rates of outside currencies with the EMU currencies (e.g. the dollar/DM rate). As a result, turbulence in these foreign exchange markets is likely during the approach to EMU. The emergence of speculative bubbles cannot be excluded. We discuss the possible solutions to this problem. They all involve steps towards providing an anchor in the foreign exchange markets.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1677.

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Date of creation: Jul 1997
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Handle: RePEc:cpr:ceprdp:1677

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Find related papers by JEL classification:
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

Cited by:
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Maurice Obstfeld, 1999. "A Strategy for Launching the Euro," NBER Working Papers 6233, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- Obstfeld, Maurice, 1997. "A Strategy for Launching the Euro," CEPR Discussion Papers 1732, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
- Obstfeld, Maurice, 1998. "A strategy for launching the Euro," European Economic Review, Elsevier, vol. 42(6), pages 975-1007, June. [Downloadable!] (restricted)
F. Bohn, 2003. "Monetary Union and the Interest-Exchange Rate Trade-off," Economics Discussion Papers 554, University of Essex, Department of Economics. [Downloadable!]
Other versions:
- Frank Bohn, 2004. "Monetary Union and the Interest-Exchange Rate Trade-off," Open Economies Review, Springer, vol. 15(2), pages 111-141, 04. [Downloadable!]

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