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EMU and the External Value of the Euro

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  • Demertzis, Maria
  • Hughes Hallett, Andrew

Abstract

The size and economic relevance of Europe may imply a new role for the EURO in the international financial markets. But will the EURO compete with the $US and the Yen for a place in the basket of international currencies? Will that induce a bipolar or indeed tri-polar system, and with what consequences? Two important uncertainties arise from the fact that the long run trend of the EURO depends on the economic performance of the partner countries as well as on the properties of the new currency. They are: a) the international use of the EURO in trade, as well as its effect on the stability of the foreign exchange markets more generally, and b) the implementation of monetary and fiscal policies: how the new European policy mix will affect the degree of international policy co-ordination and exchange rate management. Much of this uncertainty is due to the fact that some of the effects will work in opposite directions and many will be felt gradually (primarily those that are dependent on private sector expectations), while others will become obvious as soon as the EURO is introduced. In this paper we discuss some of the reasons why the EURO might be strong or weak but more importantly why it may be volatile at least in the initial stages. Finally, we calculate the "synthetic" EURO and show how one EURO is not one ECU, an additional reason why it may prove volatile.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2058.

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Date of creation: Feb 1999
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Handle: RePEc:cpr:ceprdp:2058

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Keywords: currency markets; EMU; Euro; Exchange Rates;

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References

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  1. Rudiger Dornbusch & Carlo A. Favero & Francesco Giavazzi, 1998. "The Immediate Challenges for the European Central Bank," NBER Working Papers 6369, National Bureau of Economic Research, Inc.
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  3. Woodford, Michael, 1995. "Price-level determinacy without control of a monetary aggregate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 1-46, December.
  4. Rudi Dornbusch & Carlo Favero & Francesco Giavazzi, 1998. "Immediate challenges for the European Central Bank," Economic Policy, CEPR;CES;MSH, vol. 13(26), pages 15-64, 04.
  5. Martin, Philippe, 1997. "The Exchange Rate Policy of the Euro: A Matter of Size?," CEPR Discussion Papers 1646, C.E.P.R. Discussion Papers.
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  8. Kenneth Rogoff, 1998. "Blessing or curse? Foreign and underground demand for euro notes," Economic Policy, CEPR;CES;MSH, vol. 13(26), pages 261-303, 04.
  9. Philipp Hartmann, 1996. "The Future of the Euro as an International Currency: a Transactions Perspective," FMG Special Papers sp91, Financial Markets Group.
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Cited by:
  1. Chinn, Menzie David, 2000. "The empirical determinants of the Euro: Short and long run perspectives," SFB 373 Discussion Papers 2000,43, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.

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