Why Has the Euro Been so Weak?

Guy Meredith

No 2001/155, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; deutsche mark; equity price; aggregate demand; capital market; exchange rates; equity prices; euro weakness; dollar rate; exchange rate movement; productivity growth; market capitalization; dollar exchange rate; debt issuance; euro depreciation; euro-region resident; euro appreciation; Currencies; Stocks; Real interest rates; Productivity; Global (search for similar items in EconPapers)
Pages: 50
Date: 2001-10-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

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