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The euro exchange rate during the European sovereign debt crisis - dancing to its own tune?

Author

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  • Ehrmann, Michael
  • Osbat, Chiara
  • Stráský, Jan
  • Uusküla, Lenno

Abstract

This paper studies the determinants of the euro exchange rate during the European sovereign debt crisis, allowing a role for macroeconomic fundamentals, policy actions and the public debate by policy makers. It finds that the euro exchange rate mainly danced to its own tune, with a particularly low explanatory power for macroeconomic fundamentals. Among the few factors that are found to have affected changes in exchanges rate levels are policy actions at the EU level and by the ECB. The findings of the paper also suggest that financial markets might have been less reactive to the public debate by policy makers than previously feared. Still, there are instances where exchange rate volatility was increasing in response to news, such as on days when several politicians from AAA-rated countries went public with negative statements, suggesting that communication by policy makers at times of crisis should be cautious about triggering undesirable financial market reactions. JEL Classification: E52, E62, F31, F42, G14

Suggested Citation

  • Ehrmann, Michael & Osbat, Chiara & Stráský, Jan & Uusküla, Lenno, 2013. "The euro exchange rate during the European sovereign debt crisis - dancing to its own tune?," Working Paper Series 1532, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20131532
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    References listed on IDEAS

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    Cited by:

    1. Claeys, Peter & Vašíček, Bořek, 2014. "Measuring bilateral spillover and testing contagion on sovereign bond markets in Europe," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 151-165.
    2. Baum, Christopher F. & Schäfer, Dorothea & Stephan, Andreas, 2016. "Credit rating agency downgrades and the Eurozone sovereign debt crises," Journal of Financial Stability, Elsevier, vol. 24(C), pages 117-131.
    3. Conrad, Christian & Zumbach, Klaus Ulrich, 2016. "The effect of political communication on European financial markets during the sovereign debt crisis," Journal of Empirical Finance, Elsevier, vol. 39(PB), pages 209-214.
    4. Forti Grazzini, Caterina & Rieth, Malte, 2017. "Interest Rates and Exchange Rates in Normal and Crisis Times," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168281, Verein für Socialpolitik / German Economic Association.
    5. Nektarios Aslanidis & Charlotte Christiansen, 0711. "Flight to Safety from European Stock Markets," CREATES Research Papers 2017-38, Department of Economics and Business Economics, Aarhus University.
    6. Ramona Jimborean & Anna Kelber, 2017. "Foreign Direct Investment Drivers and Growth in Central and Eastern Europe in the Aftermath of the 2007 Global Financial Crisis," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 59(1), pages 23-54, March.
    7. Andreas Haupenthal & Matthias Neuenkirch, 2017. "Grexit news and stock returns," Applied Economics, Taylor & Francis Journals, vol. 49(39), pages 3891-3898, August.
    8. repec:wsi:gcrxxx:v:05:y:2015:i:01:n:s2010493615500087 is not listed on IDEAS
    9. Kräussl, Roman & Lehnert, Thorsten & Senulytė, Sigita, 2016. "Euro crash risk," Journal of Empirical Finance, Elsevier, vol. 38(PA), pages 417-428.
    10. Falagiarda, Matteo & Gregori, Wildmer Daniel, 2015. "The impact of fiscal policy announcements by the Italian government on the sovereign spread: A comparative analysis," European Journal of Political Economy, Elsevier, vol. 39(C), pages 288-304.
    11. Ehrmann, Michael & Fratzscher, Marcel, 2017. "Euro area government bonds – Fragmentation and contagion during the sovereign debt crisis," Journal of International Money and Finance, Elsevier, vol. 70(C), pages 26-44.
    12. Kräussl, Roman & Lehnert, Thorsten & Stefanova, Denitsa, 2016. "The European sovereign debt crisis: What have we learned?," Journal of Empirical Finance, Elsevier, vol. 38(PA), pages 363-373.
    13. Ehrmann, Michael & Fratzscher, Marcel, 2015. "Euro Area Government Bonds—Integration and Fragmentation During the Sovereign Debt Crisis," CEPR Discussion Papers 10583, C.E.P.R. Discussion Papers.
    14. M. Falagiarda & W. D. Gregori, 2014. "Fiscal Policy Announcements of Italian Governments and Spread Reaction during the Sovereign Debt Crisis," Working Papers wp961, Dipartimento Scienze Economiche, Universita' di Bologna.
    15. Bernal, Oscar & Gnabo, Jean-Yves & Guilmin, Grégory, 2016. "Economic policy uncertainty and risk spillovers in the Eurozone," Journal of International Money and Finance, Elsevier, vol. 65(C), pages 24-45.
    16. Nektarios Aslanidis & Charlotte Christiansen, 0711. "Flight to Safety from European Stock Markets," CREATES Research Papers 2017-38, Department of Economics and Business Economics, Aarhus University.
    17. Stracca, Livio, 2015. "Our currency, your problem? The global effects of the euro debt crisis," European Economic Review, Elsevier, vol. 74(C), pages 1-13.
    18. Alberto Caruso, 2016. "The Impact of Macroeconomic News on the Euro-Dollar Exchange Rate," Working Papers ECARES ECARES 2016-32, ULB -- Universite Libre de Bruxelles.
    19. repec:eee:finana:v:52:y:2017:i:c:p:130-143 is not listed on IDEAS
    20. repec:eee:jimfin:v:75:y:2017:i:c:p:14-31 is not listed on IDEAS

    More about this item

    Keywords

    announcements; exchange rates; fundamentals; sovereign debt crisis;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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