Why Has the Euro Been so Weak?
The weakness of the euro has been surprising given the widely-held expectation that it would be a strong currency. This paper critically examines explanations for the slide in the euro, finding that many are questionable on conceptual or empirical grounds. Two explanations are instead advanced that appear to be consistent both with theory and data. The first originates in the global surge in equity prices since the mid-1990s, which created a demand shock that disproportionately affected the U.S. economy. Model simulations indicate that this can explain the strength of the dollar against other currencies in recent years, accounting for about half of the decline in the effective value of the euro. The other component of euro weakness can be attributed to a mismatch between the demand and supply of euro-denominated assets that arose with the creation of the single currency in 1999. The effect of both these factors should fade over time, although near-term market volatility could be exacerbated by uncertainties about the fundamentals driving currency values.
|Date of creation:||01 Oct 2001|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (202) 623-7000
Fax: (202) 623-4661
Web page: http://www.imf.org/external/pubind.htmEmail:
More information through EDIRC
|Order Information:||Web: http://www.imf.org/external/pubs/pubs/ord_info.htm|
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.:
- McCauley, R.N., 1997.
"The Euro and the Dollar,"
Princeton Essays in International Economics
205, International Economics Section, Departement of Economics Princeton University,.
- Carsten Detken & Philipp Hartmann, 2000.
"The Euro and International Capital Markets,"
EUI-RSCAS Working Papers
27, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
- Detken, Carsten & Hartmann, Philipp, 2000. "The euro and international capital markets," CFS Working Paper Series 2000/09, Center for Financial Studies (CFS).
- Detken, Carsten & Hartmann, Philipp, 2000. "The Euro and International Capital Markets," CEPR Discussion Papers 2461, C.E.P.R. Discussion Papers.
- Detken, Carsten & Hartmann, Philipp, 2000. "The euro and international capital markets," Working Paper Series 0019, European Central Bank.
- Vincent Koen & Laurence Boone & Alain de Serres & Nicola Fuchs, 2001. "Tracking the Euro," OECD Economics Department Working Papers 298, OECD Publishing.
- Aude Pommeret & Anne Epaulard, 2001. "Agents' Preferences, the Equity Premium, and the Consumption-Saving Trade-Off; An Application to French Data," IMF Working Papers 01/117, International Monetary Fund.
- R. Mehra & E. Prescott, 2010.
"The equity premium: a puzzle,"
Levine's Working Paper Archive
1401, David K. Levine.
- William D. Nordhaus, 2000.
"Productivity Growth and the New Economy,"
Cowles Foundation Discussion Papers
1284, Cowles Foundation for Research in Economics, Yale University.
- Torsten SlÃ¸k & Hali J. Edison, 2001. "New Economy Stock Valuations and Investmen in the 1990's," IMF Working Papers 01/78, International Monetary Fund.
- Torsten SlÃ¸k & Hali J. Edison, 2001. "Wealth Effects and the New Economy," IMF Working Papers 01/77, International Monetary Fund.
- Peter Isard & Ben Hunt & Douglas Laxton, 2001.
"The Macroeconomic Effects of Higher Oil Prices,"
IMF Working Papers
01/14, International Monetary Fund.
- Giancarlo Corsetti & Paolo Pesenti, 1999. "Stability, Asymmetry, and Discontinuity: The Launch of European Monetary Union," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(2), pages 295-372.
- Hans-Werner Sinn & Frank Westermann, 2001. "Why Has the Euro Been Falling?," CESifo Working Paper Series 493, CESifo Group Munich.
- Gabriele Galati & Kostas Tsatsaronis, 2001. "The impact of the euro on Europe's financial markets," BIS Working Papers 100, Bank for International Settlements.
- Cedric Tille & Nicolas Stoffels & Olga Gorbachev, 2001. "To what extent does productivity drive the dollar?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 7(Aug).
- Hans-Werner Sinn & Frank Westermann, 2001. "Why Has the Euro Been Falling? An Investigation into the Determinants of the Exchange Rate," NBER Working Papers 8352, National Bureau of Economic Research, Inc.
- Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:01/155. 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: (Jim Beardow)or (Hassan Zaidi)
If references are entirely missing, you can add them using this form.