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Tracking the Euro's Progress

  • Chinn, Menzie D
  • Alquist, Ron

The evolution of the euro since its inception has appeared inexplicable. This paper develops a monetary model of the euro/US dollar exchange rate to track the progress of the currency, both before and after Stage 3 EMU. The relationship between the exchange rate, money stocks, GDP, interest and inflation rates, and prices is identified. The observed patterns of behaviour during the 1990s are used to predict the euro's value up to mid-2000; a consistent finding is that the euro is over-predicted by 23-30%. This finding is robust to the use of alternative sample periods and alternative estimation methodologies, as long as each of the variables is treated as endogenous. This monetary model does not give much weight to factors such as productivity. However, the past evolution of European exchange rates suggests that productivity trends are indeed important. Some estimates suggest that an annual one percentage point in the intercountry differential in tradable-nontradable productivity causes a 0.85-1.7% real appreciation of a currency. Since recent sectoral productivity data are unavailable, we rely upon potential GDP measures to assess likely trends in the euro. We conclude that without an upward shift in Euroland potential growth, the euro will tend to depreciate over time. Copyright 2000 by Blackwell Publishers Ltd.

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Article provided by Wiley Blackwell in its journal International Finance.

Volume (Year): 3 (2000)
Issue (Month): 3 (November)
Pages: 357-73

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Handle: RePEc:bla:intfin:v:3:y:2000:i:3:p:357-73
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