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Why Has the Euro Been Falling? An Investigation into the Determinants of the Exchange Rate

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  • Hans-Werner Sinn
  • Frank Westermann

Abstract

This paper reconsiders the determinants of the exchange rate by studying the historical episode after the fall of the Iron Curtain. Testing a modified portfolio balance model, we attribute the strength of the deutschmark in the early nineties and the puzzling decline of the euro during its virtual existence to changes in the demand for deutschmarks in eastern Europe and to variations in the demand for black money balances in Europe as a whole. We reject the view that the strength of the dollar and the weakness of the euro reflect the prosperity of the US and the weakness of the European economy on both theoretical and empirical grounds.

Suggested Citation

  • 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.
  • Handle: RePEc:nbr:nberwo:8352
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    References listed on IDEAS

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    1. Sinn, Hans-Werner & Feist, Holger, 1997. "Eurowinners and Eurolosers: The distribution of seigniorage wealth in EMU1," European Journal of Political Economy, Elsevier, vol. 13(4), pages 665-689, December.
    2. Dooley, Michael & Isard, Peter, 1982. "A portfolio-balance rational-expectations model of the dollar-mark exchange rate," Journal of International Economics, Elsevier, vol. 12(3-4), pages 257-276, May.
    3. Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 13-47, March.
    4. Hans-Werner Sinn & Holger Feist, 1997. "Eurowinners and Eurolosers: The Distribution of Seigniorage Wealth in EMU," NBER Working Papers 6072, National Bureau of Economic Research, Inc.
    5. Frankel, Jeffrey A, 1982. "The Mystery of the Multiplying Marks: A Modification of the Monetary Model," The Review of Economics and Statistics, MIT Press, vol. 64(3), pages 515-519, August.
    6. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-329, June.
    7. Jeffrey A. Frankel., 1987. "Monetary and Portfolio Balance Models of Exchange Rate Determination," Economics Working Papers 8752, University of California at Berkeley.
    8. Hans-Werner Sinn, 1983. "International capital movements, flexible exchange rates, and the IS-LM model : A comparison between the portfolio-balance and the flow hypotheses," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 119(1), pages 36-63, March.
    9. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    10. Michael Dooley & Jeffrey Frankel & Donald J. Mathieson, 1987. "International Capital Mobility: What Do Saving-Investment Correlations Tell Us?," IMF Staff Papers, Palgrave Macmillan, vol. 34(3), pages 503-530, September.
    11. Branson, William H. & Halttunen, Hannu & Masson, Paul, 1977. "Exchange rates in the short run: The dollar-dentschemark rate," European Economic Review, Elsevier, vol. 10(3), pages 303-324.
    12. Fried, Joel & Howitt, Peter, 1983. "The Effects of Inflation on Real Interest Rates," American Economic Review, American Economic Association, vol. 73(5), pages 968-980, December.
    13. Hans-Werner Sinn & Holger Feist, 2000. "Seignorage Wealth in the Eurosystem: Eurowinners and Eurolosers Revisited," CESifo Working Paper Series 353, CESifo Group Munich.
    14. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
    15. Richard D. Porter & Ruth Judson, 1996. "The location of U.S. currency: how much is abroad?," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 883-903.
    16. Seitz, Franz, 1995. "Der DM-Umlauf im Ausland," Discussion Paper Series 1: Economic Studies 1995,01, Deutsche Bundesbank.
    17. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
    18. Ronald Macdonald & Mark P. Taylor, 1993. "The Monetary Approach to the Exchange Rate: Rational Expectations, Long-Run Equilibrium, and Forecasting," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 89-107, March.
    19. Robert Murphy & Carl Duyne, 1980. "Asset market approaches to exchange rate determination: A comparative analysis," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 116(4), pages 627-656, December.
    20. Barry Eichengreen & Charles Wyplosz, 1993. "The Unstable EMS," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1), pages 51-144.
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    Cited by:

    1. Martin D. D. Evans & Richard K. Lyons, 2017. "Are Different-Currency Assets Imperfect Substitutes?," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 10, pages 415-456 World Scientific Publishing Co. Pte. Ltd..
    2. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2015. "Wave function method to forecast foreign currencies exchange rates at ultra high frequency electronic trading in foreign currencies exchange markets," MPRA Paper 67470, University Library of Munich, Germany.
    3. Gebhard Flaig & Wolfgang Nierhaus & Wolfgang Meister & Oscar-Erich Kuntze & Andrea Gebauer & Erich Langmantel & Martin Meurers & Monika Ruschinski & Timo Wollmershäuser, 2003. "ifo Konjunkturprognose 2004: Erholung hat begonnen," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 56(24), pages 16-42, December.
    4. Guy M Meredith, 2001. "Why Has the Euro Been so Weak?," IMF Working Papers 01/155, International Monetary Fund.
    5. Kaltenhäuser, Bernd, 2001. "Explaining the Dollar-Euro rate: Do stock market returns mater?," CFS Working Paper Series 2001/06, Center for Financial Studies (CFS).
    6. Hans-Werner Sinn & Wolfgang Nierhaus & Wolfgang Meister, 2001. "Vor der Talsohle," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 54(24), pages 27-42, January.
    7. David Leuwer & Bernd Süssmuth, 2013. "The Exchange Rate Susceptibility of Some European Core Industries and the Currency Union," CESifo Working Paper Series 4253, CESifo Group Munich.
    8. Leuwer, David & Süßmuth, Bernd, 2017. "The exchange rate susceptibility of European core industries, 1995-2010," Working Papers 147, University of Leipzig, Faculty of Economics and Management Science.

    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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