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Why Has the Euro Been Falling? An Investigation into the Determinants of the Exchange Rate

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Hans-Werner Sinn
Frank Westermann

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Abstract

This paper reconsiders the determinants of the exchange rate by studying the historical episode after the fall of the Iron Curtain. Testing a modified portfolio balance model, we attribute the strength of the deutschmark in the early nineties and the puzzling decline of the euro during its virtual existence to changes in the demand for deutschmarks in eastern Europe and to variations in the demand for black money balances in Europe as a whole. We reject the view that the strength of the dollar and the weakness of the euro reflect the prosperity of the US and the weakness of the European economy on both theoretical and empirical grounds.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8352.

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Date of creation: Jul 2001
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Handle: RePEc:nbr:nberwo:8352

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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References listed on IDEAS
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.:
  1. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May. [Downloadable!] (restricted)
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  2. Frankel, Jeffrey A, 1982. "The Mystery of the Multiplying Marks: A Modification of the Monetary Model," The Review of Economics and Statistics, MIT Press, vol. 64(3), pages 515-19, August. [Downloadable!] (restricted)
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  3. Hans-Werner Sinn & Holger Feist, 2000. "Seignorage Wealth in the Eurosystem: Eurowinners and Eurolosers Revisited," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  4. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February. [Downloadable!] (restricted)
  5. Dooley, Michael & Isard, Peter, 1982. "A portfolio-balance rational-expectations model of the dollar-mark exchange rate," Journal of International Economics, Elsevier, vol. 12(3-4), pages 257-276, May. [Downloadable!] (restricted)
  6. Richard D. Porter & Ruth A. Judson, 1996. "The location of U.S. currency: how much is abroad?," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 883-903.
  7. Hans-Werner Sinn & Holger Feist, 1997. "Eurowinners and Eurolosers: The Distribution of Seignorage Wealth in EMU," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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  8. Fried, Joel & Howitt, Peter, 1983. "The Effects of Inflation on Real Interest Rates," American Economic Review, American Economic Association, vol. 73(5), pages 968-80, December. [Downloadable!] (restricted)
  9. Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 13-47, March. [Downloadable!] (restricted)
  10. Jeffrey A. Frankel., 1987. "Monetary and Portfolio Balance Models of Exchange Rate Determination," Economics Working Papers 8752, University of California at Berkeley.
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  11. Branson, William H. & Halttunen, Hannu & Masson, Paul, 1977. "Exchange rates in the short run: The dollar-dentschemark rate," European Economic Review, Elsevier, vol. 10(3), pages 303-324. [Downloadable!] (restricted)
  12. Friedrich Schneider & Dominik H. Enste, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March. [Downloadable!] (restricted)
  13. Mark P. Taylor & Ronald MacDonald, 1992. "The Monetary Approach to the Exchange Rate: Rational Expectations, Long-Run Equilibrium and Forecasting," IMF Working Papers 92/34, International Monetary Fund.
  14. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June. [Downloadable!] (restricted)
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  15. Robert Murphy & Carl Duyne, 1980. "Asset market approaches to exchange rate determination: A comparative analysis," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 116(4), pages 627-656, December. [Downloadable!] (restricted)
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  1. Guy Meredith, 2001. "Why Has the Euro Been So Weak?," IMF Working Papers 01/155, International Monetary Fund. [Downloadable!]
  2. Catherine L. Mann & Ellen E. Meade, 2002. "Home Bias, Transactions Costs, and Prospects for the Euro: A More Detailed Analysis," CEP Discussion Papers 0537, Centre for Economic Performance, LSE. [Downloadable!]
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