Download This PaperA Puzzle Solved: The Euro is the D.Mark
Universita Cattolica del Sacro Cuore di Milano Working Paper No. 46
28 Pages Posted: 22 Nov 2002
Date Written: September 2002
Abstract
Several alternative explanations have been put forward to explain what has been named the "mystery" of the weak Euro, after it started. We test a new hypothesis which is based on the historical process leading to the new European currency. It was necessary to convince the German public opinion that the Euro would have been as good as the DM.
Also the new European Central Bank - based in Frankfurt - should have been as capable as the Bundesbank in delivering monetary stability. This is therefore the hypothesis that we test and find positive results for. The weakness of the Euro mirrors what would have happened if the D. Mark were still alive. The quest for a more European currency continues.
Keywords: euro, EMU, exchange rates, uncovered interest rate parity, ECB, interest rate rule.
JEL Classification: E50, F30, F41, G15
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