Evolution of Dollar/Euro Exchange Rate Before and after the Birth of Euro and Policy Implications

24 Pages Posted: 17 Aug 2006

See all articles by Chen Heng

Chen Heng

National University of Singapore - Department of Economics

Dietrich Fausten

Monash University - Department of Economics

Wing-Keung Wong

Asia University, Department of Finance

Date Written: July 2006

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 greenback since World War II. The fact that the unipolar international monetary system, dominated by the US dollar, 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

JEL Classification: F15, G14, P34

Suggested Citation

Heng, Chen and Fausten, Dietrich and Wong, Wing-Keung, Evolution of Dollar/Euro Exchange Rate Before and after the Birth of Euro and Policy Implications (July 2006). Available at SSRN: https://ssrn.com/abstract=924525 or http://dx.doi.org/10.2139/ssrn.924525

Chen Heng (Contact Author)

National University of Singapore - Department of Economics ( email )

Singapore 117591
Singapore

Dietrich Fausten

Monash University - Department of Economics ( email )

Wellington Road
Clayton, Victoria 3
Australia

Wing-Keung Wong

Asia University, Department of Finance ( email )

Taiwan
Taiwan

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