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The Indeterminacy of the Euro Conversion Rates. Why it Matters and How it can be Solved

Author

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  • De Grauwe, Paul
Abstract
The Maastricht Treaty and the Madrid Council decision severely restrict the choice of the euro conversion rates. In practical terms the authorities can only select the Ecu rates prevailing in the market the day before conversion. The market will lack a fixed point, however, so that infinite possible Ecu rates (and thus euro rates) could emerge. This indeterminacy problem is not solved by announcing fixed bilateral conversion rates in advance. The indeterminacy of the euro rates will spill over into an indeterminacy of the exchange rates of outside currencies with the EMU currencies (e.g. the dollar/DM rate). As a result, turbulence in these foreign exchange markets is likely during the approach to EMU. The emergence of speculative bubbles cannot be excluded. We discuss the possible solutions to this problem. They all involve steps towards providing an anchor in the foreign exchange markets.

Suggested Citation

  • De Grauwe, Paul, 1997. "The Indeterminacy of the Euro Conversion Rates. Why it Matters and How it can be Solved," CEPR Discussion Papers 1677, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:1677
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    Citations

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    Cited by:

    1. Obstfeld, Maurice, 1998. "A strategy for launching the Euro," European Economic Review, Elsevier, vol. 42(6), pages 975-1007, June.
    2. Robert P. Flood & Peter M. Garber, 2000. "Is Launching the Euro Unstable in the Endgame?," NBER Chapters, in: Currency Crises, pages 163-177, National Bureau of Economic Research, Inc.
    3. Bronka Rzepkowski, 1997. "Impact de l'annonce de la modalité de fixation des taux de conversion des monnaies européennes," Économie et Prévision, Programme National Persée, vol. 128(2), pages 145-159.
    4. De Grauwe, Paul & Dewachter, Hans & Veestraeten, Dirk, 1999. "Price dynamics under stochastic process switching: some extensions and an application to EMU1," Journal of International Money and Finance, Elsevier, vol. 18(2), pages 195-224, February.

    More about this item

    Keywords

    Exchange Rate; Maastricht Treaty; Monetary Integration;
    All these keywords.

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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