Is There a Structural Break in Equilibrium Velocity in the Euro Area? (original) (raw)

Six months in the life of the euro: What have we learnt

Tijdschrift voor Politieke Economie 21(4), 4-25, 1999

The paper considers what lessons can be learnt from the launch and first 6 months of formal operation of the euro. On balance, the early performance has been creditable. The very fact that a broad, inclusive Euro Area took shape on January 1, 1999, confounded many sceptics. Payments and settlement systems have performed well. Monetary policy in the Euro Area has been conjuncturally appropriate. The ‘weakness’ of the euro since it launch has been a major boon to the Euro Area. Cyclical non-synchronisation among the membersof the euro area, while a fact, is a non-issue, because even autonomous national monetary policies with flexible exchange rates cannot dampen, let alone eliminate, normal national business cycle fluctuations. The paper outlines a new approach to optimal currency areas, emphasising temporary nominal rigidities, international financial integration and a view of flexible exchange rates as a source of shocks and instability rather than as effective shock absorbers or adjustment mechanisms for fundamental shocks originating elsewhere. The only low mark on the euro score sheet reflects the lack of openness and transparency and, because of that, the inadequate accountability of the European Central Bank.

Why the Euro Will Be Strong: An Approach Based on Equilibrium Exchange Rates

Revue économique

The real equilibrium exchange rate proposed in this paper is the long run parity which is consistent with the Balassa effect and the sustainability of the external position. Non-price competitiveness factors are also taken into account. Tests are made for three European currencies : mark, franc and lira against dollar. Observed data of real exchange rates are shown to be cointegrated with the fundamentals of the model. The three European currencies are then aggregated according to their weight in the ECU, in order to construct a proxy of the euro. An equilibrium exchange rate of the euro against dollar is calculated and the contributions of the different fundamentals are analysed.