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Evolution Of Dollar/Euro Exchange Rate Before And After The Birth Of Euro And Policy Implications

Author

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  • Heng Chen
  • Dietrich K. Fausten
  • Wing-Keung Wong

Abstract

One possible consequence of the establishment of the Euro is a challenge to the hegemony of the US dollar as the predominant international currency. No other currency has been able to rival the international role of the national currency of the US since World War II. The fact that the unipolar international monetary system can be unstable in the presence of large shocks opens a window of opportunity for the Euro to promote systemic stability. The present study pursues this conjecture by, first, exploring with cointegration and ECM techniques the interdependence between the dynamics of the Dollar/Euro exchange rate and economic fundamentals in the context of a monetary exchange rate model. Identification of the key determinants of the value of the Euro informs our analysis of the policy stance of the European Central Bank regarding the long-run global role of the Euro. Secondly, we explore whether the opportunity for a prominent systemic role of the Euro has been realized by examining the impact of the Euro on the global financial market.

Suggested Citation

  • Heng Chen & Dietrich K. Fausten & Wing-Keung Wong, 2006. "Evolution Of Dollar/Euro Exchange Rate Before And After The Birth Of Euro And Policy Implications," Monash Economics Working Papers 14/06, Monash University, Department of Economics.
  • Handle: RePEc:mos:moswps:2006-14
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    File URL: http://www.buseco.monash.edu.au/eco/research/papers/2006/1406euro.pdf
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    References listed on IDEAS

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    1. Paul De Grauwe, 2002. "Challenges for Monetary Policy in Euroland," Journal of Common Market Studies, Wiley Blackwell, vol. 40(4), pages 693-718, November.
    2. Frankel, Jeffrey A. & Rose, Andrew K., 1995. "Empirical research on nominal exchange rates," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 33, pages 1689-1729 Elsevier.
    3. Cohen, Daniel & Loisel, Olivier, 2001. "Why was the euro weak? Markets and policies," European Economic Review, Elsevier, vol. 45(4-6), pages 988-994, May.
    4. Robert Mundell, 1998. "What the euro means for the dollar and the international Monetary system," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 26(3), pages 227-237, September.
    5. Hartmann, Philipp & Issing, Otmar, 2002. "The international role of the euro," Journal of Policy Modeling, Elsevier, vol. 24(4), pages 315-345, July.
    6. Fritz Breuss, 2002. "Was ECB's Monetary Policy Optimal?," WIFO Working Papers 173, WIFO.
    7. Philip Arestis & Iris Biefang-Frisancho Mariscal & Andrew Brown & Malcolm Sawyer, 2002. "Explaining the EURO's Initial Decline," Eastern Economic Journal, Eastern Economic Association, vol. 28(1), pages 71-88, Winter.
    8. Chinn, Menzie D & Alquist, Ron, 2000. "Tracking the Euro's Progress," International Finance, Wiley Blackwell, vol. 3(3), pages 357-373, November.
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    Cited by:

    1. Apergis, Nicholas & Zestos, George K. & Shaltayev, Dmitriy S., 2012. "Do market fundamentals determine the Dollar–Euro exchange rate?," Journal of Policy Modeling, Elsevier, vol. 34(1), pages 1-15.

    More about this item

    Keywords

    Euro; Exchange rate; Monetary model; Cointegration;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • P34 - Economic Systems - - Socialist Institutions and Their Transitions - - - Finance

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