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Why Has the Euro Been Falling?

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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?," CESifo Working Paper Series 493, CESifo.
  • Handle: RePEc:ces:ceswps:_493
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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. 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.
    3. Hans-Werner Sinn & Holger Feist, 2000. "Seignorage Wealth in the Eurosystem: Eurowinners and Eurolosers Revisited," CESifo Working Paper Series 353, CESifo.
    4. 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.
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