The Emergence of the Euro as an International Currency
*The European Union will enter Stage Three of Economic and Monetary Union (EMU) in 1999. The development of euro financial markets and thickness externalities in the use of the euro as means of payment will be the major factors determining the importance of the euro as an international currency. As euro securities markets become deeper and more liquid and transaction costs fall, euro assets will become more attractive, and the use of the euro as a vehicle currency will expand; the two effects interact, as we demonstrate. We use a three-region world model as a framework for alternative steady-state scenarios. With forex and securities market data, we assess the plausibility of those scenarios and the implications for economic efficiency (welfare). We find that the euro may take on some of the current roles of the dollar, but the extent to which it does will depend on policy decisions and on the beliefs of market participants. The welfare analysis reveals potential quantitatively significent benefits for the euro area, at the cost of the United States and (to a lesser degree) Japan. During the transition to the new equilibrium, the main effect of the introduction of the euro will come through portfolio shifts that are likely to favour an appreciation of the new currency vis-à-vis the dollar (and the yen). Whatever the likely long-run outcome, the dollar will remain quantitatively dominant for some time because of inertia and hysteresis – with multiple equilibria and likely threshold effects, we would not expect a quick transition to a new equilibrium. The early period could see considerable instability associated with the emergence of the euro, especially if the United States were to resist any decline in the international status of the dollar.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
|Date of creation:||Oct 1997|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
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.:
- Takagi, Shinji, 1987. "Transactions Costs and the Term Structure of Interest Rates in the OTC Bond Market in Japan," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(4), pages 515-527, November.
- Krugman, Paul, 1980.
"Vehicle Currencies and the Structure of International Exchange,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 12(3), pages 513-526, August.
- Paul R. Krugman, 1979. "Vehicle Currencies And the Structure Of International Exchange," NBER Working Papers 0333, National Bureau of Economic Research, Inc.
- Bessembinder, Hendrik, 1994. "Bid-ask spreads in the interbank foreign exchange markets," Journal of Financial Economics, Elsevier, vol. 35(3), pages 317-348, June.
- Eichengreen, Barry, 1987. "Conducting the international orchestra: Bank of England leadership under the classical gold standard," Journal of International Money and Finance, Elsevier, vol. 6(1), pages 5-29, March.
- Richard K. Lyons., 1997. "Profits and Position Control: A Week of FX Dealing," Research Program in Finance Working Papers RPF-273, University of California at Berkeley.
- Kenen,Peter B., 1995. "Economic and Monetary Union in Europe," Cambridge Books, Cambridge University Press, number 9780521558839, August.
- Agnès Bénassy-Quéré, 1996. "Potentialities and Opportunities of the Euro as an International Currency," Working Papers 1996-09, CEPII research center.
- C. Randall Henning, 1994. "Currencies and Politics in the United States, Germany, and Japan," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 15, November.
- Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-954, August.
- George Alogoskoufis & Richard Portes, 1990. "International Costs and Benefits from EMU," NBER Working Papers 3384, National Bureau of Economic Research, Inc.
- Alogoskoufis, George & Portes, Richard, 1990. "International Costs and Benefits from EMU," CEPR Discussion Papers 424, C.E.P.R. Discussion Papers.
- Michael P. Dooley & J. Saul Lizondo & Donald J. Mathieson, 1989. "The Currency Composition of Foreign Exchange Reserves," IMF Staff Papers, Palgrave Macmillan, vol. 36(2), pages 385-434, June.
- C. Randall Henning, 1997. "Cooperating with Europe's Monetary Union," Peterson Institute Press: Policy Analyses in International Economics, Peterson Institute for International Economics, number pa49, February.
- C. Randall Henning, 1997. "Cooperating with Europe's Monetary Union," Peterson Institute Press: All Books, Peterson Institute for International Economics, number pa49, November.
- Black, Stanley W., 1985. "International money and international monetary arrangements," Handbook of International Economics,in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 22, pages 1153-1193 Elsevier.
- Krugman, Paul, 1989. "The J-Curve, the Fire Sale, and the Hard Landing," American Economic Review, American Economic Association, vol. 79(2), pages 31-35, May.
- McCauley, R.N., 1997. "The Euro and the Dollar," Princeton Essays in International Economics 205, International Economics Section, Departement of Economics Princeton University,.
- Robert N. McCauley, 1997. "The euro and the dollar," BIS Working Papers 50, Bank for International Settlements.
- Jones, Robert A, 1976. "The Origin and Development of Media of Exchange," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 757-775, August.
- Tavlas, G.S., 1991. "On the International Use of Currencies: the Case of the Deutsche Mark," Princeton Studies in International Economics 181, International Economics Section, Departement of Economics Princeton University,.
- Artus, P., 1996. "A Strong Euro or a Weak Euro?," Papers 96-02/ei, Caisse des Depots et Consignations - Cahiers de recherche.
- George S. Tavlas, 1997. "The International Use of the US Dollar: An Optimum Currency Area Perspective," The World Economy, Wiley Blackwell, vol. 20(6), pages 709-747, 09.
- Paul R. Krugman, 1984. "The International Role of the Dollar: Theory and Prospect," NBER Chapters,in: Exchange Rate Theory and Practice, pages 261-278 National Bureau of Economic Research, Inc.
- Garry J. Schinasi & Alessandro Prati, 1997. "European Monetary Union and International Capital Markets; Structural Implications and Risks," IMF Working Papers 97/62, International Monetary Fund.
- John F. O. Bilson & Richard C. Marston, 1984. "Exchange Rate Theory and Practice," NBER Books, National Bureau of Economic Research, Inc, number bils84-1, Enero-Jun.
- Robert N. McCauley & William R. White, 1997. "The Euro and European financial markets," BIS Working Papers 41, Bank for International Settlements.
- Ammer, John & Brunner, Allan D., 1997. "Are banks market timers or market makers? Explaining foreign exchange trading profits," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 7(1), pages 43-60, April.
- John Ammer & Allan D. Brunner, 1994. "Are banks market timers or market makers? Explaining foreign exchange trading profits," International Finance Discussion Papers 484, Board of Governors of the Federal Reserve System (U.S.).
- Michael J. Fleming, 1997. "The round-the-clock market for U.S. Treasury securities," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 9-32.
- Hartmann, Philipp, 1998. "Do Reuters spreads reflect currencies' differences in global trading activity?," Journal of International Money and Finance, Elsevier, vol. 17(5), pages 757-784, October.
- Philipp Hartmann, 1997. "Does Reuters Spreads Reflect Currencies Differences in Global Trading Activity?," FMG Discussion Papers dp265, Financial Markets Group.
- Yusuru Ozeki & George S Tavlas, 1992. "The Internationalization of Currencies; An Appraisal of the Japanese Yen," IMF Occasional Papers 90, International Monetary Fund.
- Richard K. Lyons, 1996. "Foreign Exchange Volume: Sound and Fury Signifying Nothing?," NBER Chapters,in: The Microstructure of Foreign Exchange Markets, pages 183-208 National Bureau of Economic Research, Inc.
- Richard K. Lyons., 1995. "Foreign Exchange Volume: Sound and Fury Signifying Nothing?," Research Program in Finance Working Papers RPF-243, University of California at Berkeley.
- Richard K. Lyons, 1995. "Foreign Exchange Volume: Sound and Fury Signifying Nothing?," NBER Working Papers 4984, National Bureau of Economic Research, Inc.
- D. Begg & F. Giavazzi & Ch. Wyplosz, 1999. "Options for the Future Exchange RatePolicy of the EMU," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 1.
- Alogoskoufis,George & Portes,Richard & Papademos,Lucas (ed.), 1991. "External Constraints on Macroeconomic Policy," Cambridge Books, Cambridge University Press, number 9780521405270, August.
- Jeffrey A. Frankel & Giampaolo Galli & Alberto Giovannini, 1996. "The Microstructure of Foreign Exchange Markets," NBER Books, National Bureau of Economic Research, Inc, number fran96-1, Enero-Jun.
- Philipp Hartmann, 1996. "The Future of the Euro as an International Currency: a Transactions Perspective," FMG Special Papers sp91, Financial Markets Group.
- Lyons, Richard K., 1997. "A simultaneous trade model of the foreign exchange hot potato," Journal of International Economics, Elsevier, vol. 42(3-4), pages 275-298, May. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:1741. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.