The Euro Exchange Rate During the European Sovereign Debt Crisis - Dancing to Its Own Tune?

46 Pages Posted: 8 May 2013

See all articles by Michael Ehrmann

Michael Ehrmann

European Central Bank (ECB); Bank of Canada

Chiara Osbat

European Central Bank (ECB)

Jan Strasky

European Central Bank (ECB)

Lenno Uusküla

Bank of Estonia

Date Written: April 8, 2013

Abstract

This paper studies the determinants of the euro exchange rate during the European sovereign debt crisis, allowing a role for macroeconomic fundamentals, policy actions and the public debate by policy makers. It finds that the euro exchange rate mainly danced to its own tune, with a particularly low explanatory power for macroeconomic fundamentals. Among the few factors that are found to have affected changes in exchanges rate levels are policy actions at the EU level and by the ECB. The findings of the paper also suggest that financial markets might have been less reactive to the public debate by policy makers than previously feared. Still, there are instances where exchange rate volatility was increasing in response to news, such as on days when several politicians from AAA-rated countries went public with negative statements, suggesting that communication by policy makers at times of crisis should be cautious about triggering undesirable financial market reactions.

Keywords: exchange rates, fundamentals, announcements, sovereign debt crisis

JEL Classification: E52, E62, F31, F42, G14

Suggested Citation

Ehrmann, Michael and Osbat, Chiara and Strasky, Jan and Uusküla, Lenno, The Euro Exchange Rate During the European Sovereign Debt Crisis - Dancing to Its Own Tune? (April 8, 2013). ECB Working Paper No. 1532, Available at SSRN: https://ssrn.com/abstract=2246575

Michael Ehrmann (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344/7327 (Phone)
+49 69 1344/6000 (Fax)

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Chiara Osbat

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 6821 (Phone)
+49 69 1344 6000 (Fax)

Jan Strasky

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Lenno Uusküla

Bank of Estonia ( email )

Estonia Building 13
15095 Tallinn
Estonia

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