Evolution of Dollar/Euro exchange rate before and after the birth of Euro and policy implications

Heng Chen, Dietrich K Fausten, Wing-Keung Wong
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,
more » ... exploring with cointegratlon 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 detemninants 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.
doi:10.4225/03/593797bb8fdd9 fatcat:nz4tpee5bjbzlkeoff5vjjiwzq