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

Author

Listed:
  • 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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    Cited by:

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    More about this item

    Keywords

    Euro; Exchange rate; Monetary model; Cointegration;
    All these keywords.

    JEL classification:

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

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