Why Has the Euro Been Falling?

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.

[1]  H. Sinn,et al.  Seignorage Wealth in the Eurosystem: Eurowinners and Eurolosers Revisited , 2000, SSRN Electronic Journal.

[2]  F. Schneider,et al.  Shadow Economies: Size, Causes, and Consequences , 2000 .

[3]  H. Sinn,et al.  Eurowinners and Eurolosers: The Distribution of Seignorage Wealth in Emu , 1997 .

[4]  Richard D. Porter,et al.  The Location of U.S. Currency: How Much Is Abroad? , 1996 .

[5]  Alan M. Taylor,et al.  Domestic Saving and International Capital Flows Reconsidered , 1994 .

[6]  Mark P. Taylor,et al.  The Monetary Approach to the Exchange Rate: Rational Expectations, Long-Run Equilibrium and Forecasting , 1992, SSRN Electronic Journal.

[7]  J. Frankel,et al.  International Capital Mobility: What Do Saving-Investment Correlations Tell Us? , 1987 .

[8]  Jeffrey A. Frankel,et al.  Monetary and Portfolio-Balance Models of Exchange Rate Determination , 1987 .

[9]  W. Newey,et al.  A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelationconsistent Covariance Matrix , 1986 .

[10]  Kenneth S. Rogoff,et al.  Exchange rate models of the seventies. Do they fit out of sample , 1983 .

[11]  Jeffrey A. Frankel,et al.  The Mystery of the Multiplying Marks: A Modification of the Monetary Model , 1982 .

[12]  M. Dooley,et al.  A portfolio-balance rational-expectations model of the dollar-mark exchange rate , 1982 .

[13]  R. Murphy,et al.  Asset market approaches to exchange rate determination: A comparative analysis , 1980 .

[14]  D. Henderson.  The dynamic effects of exchange market intervention policy: two extreme views and a synthesis , 1979 .

[15]  Mark P. Taylor.  The Economics of Exchange Rates , 2002 .

[16]  F. Seitz.  Der Dm-Umlauf Im Ausland , 1995, SSRN Electronic Journal.

[17]  P. Grauwe.  Towards EMU without the EMS , 1994 .

[18]  Barry Eichengreen,et al.  The Unstable EMS , 1993 .

[19]  P. Howitt,et al.  The Effects of Inflation on Real Interest Rates , 1983 .

[20]  H. Sinn.  International capital movements, flexible exchange rates, and the IS-LM model : A comparison between the portfolio-balance and the flow hypotheses , 1983 .

[21]  H. Sinn.  Economic Decisions Under Uncertainty , 1983 .

[22]  W. Branson.  Asset markets and relative prices in exchange rate determination , 1980 .

[23]  Paul R. Masson,et al.  Exchange rates in the short run: The dollar-dentschemark rate , 1977 .