Why Has the Euro Been Falling? An Investigation into the Determinants of the Exchange Rate

43 Pages Posted: 28 Jun 2001 Last revised: 27 Jul 2001

See all articles by Hans-Werner Sinn

Hans-Werner Sinn

CESifo (Center for Economic Studies and Ifo Institute); National Bureau of Economic Research (NBER); Ludwig Maximilian University of Munich (LMU)

Frank Westermann

University of Osnabrueck - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Date Written: July 2001

Abstract

This paper reconsiders the determinants of the exchange rate by studying the historical episode after the fall of the Iron Curtain. Testing a modified portfolio balance model, we attribute the strength of the deutschmark in the early nineties and the puzzling decline of the euro during its virtual existence to changes in the demand for deutschmarks in eastern Europe and to variations in the demand for black money balances in Europe as a whole. We reject the view that the strength of the dollar and the weakness of the euro reflect the prosperity of the US and the weakness of the European economy on both theoretical and empirical grounds.

Suggested Citation

Sinn, Hans-Werner and Westermann, Frank, Why Has the Euro Been Falling? An Investigation into the Determinants of the Exchange Rate (July 2001). NBER Working Paper No. w8352. Available at SSRN: https://ssrn.com/abstract=275426

Hans-Werner Sinn (Contact Author)

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Ludwig Maximilian University of Munich (LMU)

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Frank Westermann

University of Osnabrueck - Department of Economics ( email )

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Osnabrueck, D-49069
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CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

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