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The Private ECU: A Currency Floating on Gossamer Wings

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  • David Folkerts-Landau
  • Peter M. Garber

Abstract

Today's value of the private ECU is driven by expectations that a European monetary authority will at some future date declare itself willing to convert the private ECU into the official basket at par. Until then, its value is not limited by any existing institutional arrangements in the European Communities, such as the Exchange Rate Mechanism of the European Monetary System. We address the question of what determines the exchange rate between the private ECU and the official Basket, and what determines ECU interest rates. The Bank for International Settlements sets the ECU overnight interest rate on clearing balances as a weighted and lagged average of the money-market rates in the EC currencies, thereby fixing a point on the ECU term-structure. This exogenous fixing of the ECU interest rate and the expectation of a future fixing of the exchange rate satisfy the fundamental requirements for a obtaining a determinate real value of what is otherwise an undefined private ECU unit of account.

Suggested Citation

  • David Folkerts-Landau & Peter M. Garber, 1992. "The Private ECU: A Currency Floating on Gossamer Wings," NBER Working Papers 4017, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:4017
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    References listed on IDEAS

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    1. Fama, Eugene F., 1980. "Banking in the theory of finance," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 39-57, January.
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    Cited by:

    1. Polly Allen, 1993. "Artificial currencies: SDRs and ECUs," Open Economies Review, Springer, vol. 4(1), pages 97-110, March.
    2. Sercu, Piet & Vinaimont, Tom, 2006. "The forward bias in the ECU: Peso risks vs. fads and fashions," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2409-2432, August.
    3. Watanabe, Shingo & Ogura, Masanobu, 2010. "How far apart are the two ACUs from each other? Asian currency unit and Asian currency union," Emerging Markets Review, Elsevier, vol. 11(2), pages 152-172, June.

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