EVOLUTION OF DOLLAR/EURO EXCHANGE RATE BEFORE AND AFTER THE BIRTH OF EURO AND POLICY IMPLICATIONS

Heng Chen, Dietrich Fausten and Wing-Keung Wong

No 14/06, Monash Economics Working Papers from Monash University, Department of Economics

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.

Keywords: Euro; Exchange rate; Monetary model; Cointegration (search for similar items in EconPapers)
JEL-codes: F15 G14 P34 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2006-07-02
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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