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This study examines the interdependence and asymmetries in the relationships between the economic policy uncertainty and the selected financial stability variables in Europe. Specifically, the impact of uncertainty on inflation, equity returns, the euro in US dollar exchange rate and interest rates is analyzed. The results show a significant negative impact of shocks in economic policy uncertainty on equity returns in Europe during the examined January 1987 – January 2023 period. Uncertainty shocks affect inflation asymmetrically at different time intervals. Asymmetric responses of interest rates and the exchange rate to uncertainty shocks are also found. The results suggest that economic policies in Europe should encompass efforts to mitigate economic uncertainty. [ABSTRACT FROM AUTHOR]

This paper studies the returns and volatility co-movements of the selected Central European currencies, namely the Czech koruna, Hungarian forint and Polish zloty against the European euro. The research uses the daily data covering the 15 years' period of membership of these countries in the EU (May 2004 - April 2019). The preliminary analyses based on calculation of the Pearson's unconditional correlations and of crosssectional standard deviation of exchange rate returns are followed by estimation of symmetric diagonal BEKK-GARCH and asymmetric diagonal BEKKGARCH models to assess both the dynamics of conditional volatility and the volatility co-movements of analysed Central European currencies. [ABSTRACT FROM AUTHOR]

Abstract: The ongoing financial crisis has drawn considerable attention to the role of credit rating agencies in the financial system. We examine how the foreign exchange market reacts to sovereign credit events prior to (2000–2006) and during the crisis (2006–2010). The sample includes a broad set of countries in Europe and Central Asia in order to investigate spillover effects. We find that rating agencies’ signals do affect the own-country exchange rate and we identify strong spillover effects to other countries’ exchange rates in the region. In both cases, the impact of outlook and watch signals is stronger than the impact of actual rating changes. Market reactions and spillovers are far stronger during the financial crisis period than pre-crisis. Negative news from all three major agencies has an impact, whereas only Moody''s positive news produces a reaction. Negative news from Fitch tends to have the strongest effect. The findings are important in enhancing understanding of the role of rating agencies and the market response to their signals. [Copyright &y& Elsevier]

This paper makes use of stochastic calculus to develop a continuous-timemodel for valuing European options on foreign exchange (FX) when both domestic and foreign spot rates follow a generalizedWiener process. Using the dollar/euro exchange rate as input for parameter estimation and employing our FX option model as a yardstick, we find that the traditional Garman-Kohlhagen FX option model, which assumes constant spot rates, values incorrectly calls and puts for different values of the ratio of exchange rate to exercise price. Specifically, it undervalues calls when the ratio is between 0.70 and 1.08, and it overvalues calls when the ratio is between 1.18 and 1.30, whereas it overvalues puts when the ratio is between 0.70 and 0.82, and it undervalues puts when the ratio is between 0.86 and 1.30. [ABSTRACT FROM AUTHOR]

By analyzing a newly compiled database of exchange rates, this article finds that in Central Europe money markets integrated cyclically during the fifteenth century. The cycles were associated with monetary debasements. Long-distance financial integration progressed in connection with the rise of the territorial state, facilitated by the synergy between princes and emperor, which helped to avoid coordination failures. For Central Europe, theories of state formation and market integration should therefore take interstate actors into account. [ABSTRACT FROM PUBLISHER]

Since the 1997 Asian financial crisis and the launch of the European Economic and Monetary Union shortly afterward, a growing number of studies have considered the idea of a so-called Asian Monetary System, mostly adopting the European Monetary System as its model. The operational adjustment burdens in the European Monetary System were asymmetrically distributed, however, in particular between Germany and the other member countries. The emulation of such an asymmetric system in East Asia is not likely to be sustainable, due to the much lower support for regional integration there than was the case in Europe. For a future Asian Monetary System to be sustainable, it should be designed in such a way as to promote symmetry in the adjustment burdens arising from its operation. To this end, it may be desirable for the Asian Monetary System to employ an exchange rate and intervention mechanism that levies adjustment burdens largely on participant currencies deviating substantially from the average member currency movements. This mechanism should also be constructed in such a way that each currency's probability of identification as a deviant currency is similar. [ABSTRACT FROM AUTHOR]

This article examines the influence of exchange rate fluctuations on public support for the euro. Existing studies of the two euro referendums in Denmark and Sweden have explained the outcomes primarily in terms of static factors, thereby ignoring the fact that support fluctuates over time. This article provides an analysis of the short-term dynamics in public support for the euro in the period leading up to the referendums. We argue that exchange rate fluctuations matter, because people attach symbolic value to their national currency and are less likely to surrender a strong currency. They are also less willing to accept the euro when it is seen as weak vis-à-vis other world currencies. Our casestudy and time-series analyses of the two euro campaigns corroborate these propositions. [ABSTRACT FROM AUTHOR]

We investigate topology and temporal evolution of the foreign currency exchange market viewed from a weighted network perspective. Based on exchange rates for a set of 46 currencies (including precious metals), we construct different representations of the FX network depending on a choice of the base currency. Our results show that the network structure is not stable in time, but there are main clusters of currencies, which persist for a long period of time despite the fact that their size and content are variable. We find a long-term trend in the network's evolution which affects the USD and EUR nodes. In all the network representations, the USD node gradually loses its centrality, while, on contrary, the EUR node has become slightly more central than it used to be in its early years. Despite this directional trend, the overall evolution of the network is noisy. [ABSTRACT FROM AUTHOR]

It is a commonly accepted view that the parity theory of forward exchange based on the law of one price was first formulated by Keynes. In this article we assess the preliminary shapes of the interest parity (IP) relation. After reviewing the early beginnings of the IP relation, we investigate two French economists of the mid-nineteenth century who have hitherto received no adequate attention. We argue that Bonnet and Juglar ought to be considered pioneers in the assessment of IP relation since Goschen's contribution is related to the specificity of 'long' exchange rates at a bimetallic time. [ABSTRACT FROM AUTHOR]

Following entrance into the European Union, Central Eastern European Countries (CEECs) are expected to join the European Monetary Union (EMU). These countries may incur considerable costs over the course of their passing through the required Exchange Rate Mechanism II (ERM-II). However, with enough bargaining leverage, CEECs may be able to pass some of these costs on to current EMU members. In turn, a CEEC's leverage depends on its ability to wield successful brinkmanship via an exchange-rate policy characterized by a "threaten-thy-neighbor" strategy. A two-stage Nash-threat game captures the essentials of the CEECs' phase of ERM-II pass-through. [ABSTRACT FROM AUTHOR]

In this paper we applied the dynamic system theory to the measurement of the stability of the European process of convergence. In particular, Lyapunov's exponents are used to verify the influence of political and economic decisions made during the creation of the European Union on the stability (or instability) of exchange rate fluctuation in different European countries. We find evidence of such relationship. [ABSTRACT FROM AUTHOR]

Evidence during the nineties about the response of real wages to shocks highlights that this response is substantially lower in European countries than in the United States and that there are important differences among European countries. Which are the reasons that explain these different reactions? In this paper, we apply meta-analytical techniques in order to provide a quantitative summary of the available evidence regarding the influence of labour market institutions on real wage flexibility. We find that the design of the study affects the obtained results, and that in more deregulated labour markets with a lower presence of trade unions, this response is particularly larger. [ABSTRACT FROM AUTHOR]

The Exchange-Rate Mechanism II (ERM II) is a Maastricht convergence criterion with which Central and Eastern European Countries (CEECs) must comply before they are admitted to the European Monetary Union (EMU). However, EMU accession is not a 'free lunch' as it entails so-called costs of convergence. Starting from the point of view that these new members of the European Union (EU) are in fact credibly committed to joining the EMU for political reasons - that is, ensuring political stability in CEECs - it is demonstrated that CEECs are able to pass some costs of convergence on to current EMU members: CEECs will under identifiable conditions threaten to halt the entire enlargement process by putting their exchange-rate regimes and, as a result, political stability at risk. In line with this rationale, the entire process of transition within ERM II, can be modelled as a two-stage threat game, which may be solved by a Rubinstein bargaining solution. [ABSTRACT FROM AUTHOR]

Currency unions have been promoted as a means to increase trade, investment and growth. A crucial issue in giving up the domestic currency is the loss of a mechanism to absorb real external shocks. High real exchange volatility between countries considering such a policy would suggest that a currency union could be quite costly in terms of large, persistent misalignment and thus balance of payments imbalances. Von Hagen and Neumann (1994) assessed the readiness of nine European countries for Euro-zone membership by examining real exchange rate variability. In this paper we analyze their predictions, and find them to be quite accurate for Europe. All of the nations which appeared ready for the Euro have joined. Of the three which did not appear prepared, two have retained their own currency, and the third has experienced real appreciation and stagnant exports. Given the prescience of this method, we apply it to nine Latin American nations. A number of countries in this region have begun to form a currency union by unilaterally adopting the U.S. dollar. The Von Hagen-Neumann method finds very high real exchange rate variability between the U.S. and the Latin American nations-indeed much higher than that between Germany and the countries which would later adopt the Euro-so adopting the dollar could cause very painful adjustment in Latin America. [ABSTRACT FROM AUTHOR]

The article analyzes the experience of foreign exchange intervention in the context of the European Monetary System (EMS) from 1979 to 1998 and the Exchange Rate Mechanism II (ERM II) in 1999. It compares the characteristics and functioning of the EMS and ERM II. It discusses the issue of effectiveness of secret intervention against overt intervention. It considers the microstructure of the foreign exchange market.

Exchange rate pass-through in a set of euro area prices along the pricing chain is examined in this paper. First, a vector autoregression (VAR) approach is used to analyze the joint time-series behavior of the euro exchange rate and a system of area-wide prices in response to an exchange rate shock. Second, the impulse-response functions from the VAR estimates are used to identify—in a ‘new open-economy macroeconomics model’—the key behavioral parameters that best replicate the pattern of exchange rate pass-through in the euro area. A key finding is that traded goods—both extra-area exports and imports—behave as though they are predominately priced in euros. The area-wide findings are compared with those for other major industrial economies. [ABSTRACT FROM AUTHOR]

Predicts the future of the euro currency. Reason behind the disappearance of the veto power of Germany; Change in manner in which executive directors of the European Monetary Union are appointed; Objectives of the European Central Bank monetary policy; Creation of the exchange rate policy.

Over the past two decades, the process of economic and monetary union (EMU) in Europe has brought the politics of exchange rates to the forefront of the policy agenda in international relations. This article will examine the significance of exchange rate policy making in Europe by considering the creation and operation of EMU as an example of club formation. There are two major benefits from viewing the process of EMU in this way. The first is that it allows a more fruitful analysis of any potential enlargement in the membership. Second, and leading on from this, it enables conclusions to be drawn regarding the optimal eventual size of the Euro area. [ABSTRACT FROM AUTHOR]

Explores the post-Bretton Woods European system of fixed but adjustable exchange rates anchored by a major regional currency. Discussion on the global context of exchange rate instability and external imbalances; History of the exchange rate mechanism (ERM); Applicability of the ERM model in the East Asian context.

The aim of this paper is to investigate whether stock prices and exchange rates are related and whether there is evidence of convergence in the structure of this relationship across members of the European Union (EU). We then examine if this relationship differs, depending on whether the system of finance prevalent in a particular country is financial market based or dominated by the banking system. Given the differences between the financial systems in some European countries, the result is of importance to those countries that have joined the European Single Currency and those attempting to converge their economies in preparation for joining at a later date, such as the UK. Stock prices have been used extensively to explain and predict the exchange rate over recent years, as they reflect capital movements between stock markets. Equities have been incorporated into a number of empirical studies of the exchange rate and in general are shown to have a highly significant effect. The exchange rate model used in this study is a simple dynamic bivariate asset parity model, which can be derived from Roll's (1979) model. Following a discussion into the differing nature of the financial systems across the EU, the model and results from the empirical tests are discussed and finally there is a summary and a discussion on the policy implications. [ABSTRACT FROM AUTHOR]

Evaluates issues regarding money integration in Europe. Technique for evaluating the regimes; Type of fixed exchange rate regime; Terms of the variance of the gross domestic product.

Analyzes border costs and real exchange rate dynamics in Europe. Use of Band-TAR estimation; Nature of transaction costs; Development of a donlinear framework.

Discusses several speculations regarding the exchange rate parities for the countries forming the European Monetary Union. Benefits of the European Monetary Union; Information on the theoretical bases for the European Monetary Union; Insight regarding the dangers of harmonization; Conclusions.

Analyzes the effects of exchange rate volatility and bilateral trade flows in Europe. Use of gravity model and panel data to examine the effects; Impact of exchange rate uncertainty on international trade; Implications for endogenous behavior of monetary authorities.

We show that within Bertola and Svensson's second-generation target zone model, mean-reverting interventions and endogenous devaluation risk are closely interrelated. Over the period 1983-93 we analyze the degree of mean reversion in the underlying fundamental process as well as the term structure of interest rate differentials vis-a-vis Germany for six Exchange Rate Mechanism currencies. For Austria, Denmark and the Netherlands, and for Belgium after 1990 our estimates are broadly in line with the first-generation target zone model, whereas those for France and Italy are in accordance with the model that allows for endogenous devaluation risk. (JEL F31, E43) [ABSTRACT FROM AUTHOR]

The article discusses the role of monetary aggregates in European countries' transition to the European Monetary Union. Quantitative targets for money and credit had become commonplace for larger European nations by the mid-1970s. These were relaxed or abandoned completely later on with the advent of financial innovation and greater importance attached to exchange rates.

Presents a review of the events leading up to the adoption of the European Monetary System in March of 1979 and the associated Exchange Rate Mechanism. Requirements of the Maastricht Treaty; Costs and benefits of a common currency; Importance of European Monetary Union from a United States perspective.

Comments on how the European Exchange Rate Mechanism (ERM) buckled under the opposition of the foreign exchange markets. Systematic weaknesses of fixed exchange rate systems; ERM in its early years; Period of crisis for the ERM; Internal economic costs of the external commitment to European currency stability in 1992; Authorization of a smaller cut in German interest rates.

Investigates the European Monetary Union criteria as indicators of an economy's suitability to a completely fixed exchange rate. Implications of Maastricht convergence criteria for individual countries; Comparisons of inflation rate and interest rate differentials; Significance of deficit and gross national debt to GDP ratio; Previous exchange rate variability context.

Reacts to the article written by Edward Gardner and William R.M. Perraudin which appeared in `Staff Papers,' regarding the European exchange rate mechanism. Rejection of the asymmetry by Gardner and Perraudin; Changes in long-run relations; Changes in long-run causal linkages.

Through multifractal detrended moving-average cross-correlation analysis (MF-X-DMA) and partial moving-average cross-correlation coefficient analysis (PDMCA), this paper studies power-law cross-correlations between renminbi (RMB) onshore and offshore markets (2013–2018). The interaction between CNY and CNH market pairs was examined with attention to how the floating exchange rate regime reform of August 11, 2015 affects their interactions. The obtained results suggest that net power-law cross-correlations exist between the CNY and CNH exchange markets (with influences of autocorrelation, interest rate difference, US Dollar, and Oil signals removed) and that the August 11, 2015 (referred to as "811") exchange reform significantly affects the trend of multiscale cross-correlation coefficient curves. This study also verifies that the risk of offshore RMB markets in Europe and the UK is larger than in Hong Kong and the US when facing a large shock. The nonlinear causal effect analysis reveals that asymmetric bidirectional nonlinear causality exists between any market pair, and the degree of asymmetry appears to have declined after the 811 exchange rate regime reform. For the offshore RMB markets in the US, Europe, and UK, there is evidence of stronger causality running from the CNH to CNY than vice versa, which implies that the foreign impulses have had an influence on the domestic market, and the floating exchange rate reform effectively improves the RMB exchange rate formation mechanism. • We examine the net power-law cross-correlations between onshore and offshore renminbi exchange markets. • Asymmetric bidirectional causality between the onshore and offshore exchange rates is found. • The floating exchange rate reform effectively improves the RMB exchange rate formation mechanism. [ABSTRACT FROM AUTHOR]

This paper investigates the roles of structural changes and exchange rates in the relationship between retail energy prices and crude oil costs. Using a dummy variable approach, this paper argues that once the structural change in this relationship is taken into consideration, the empirical results of studies that found evidence in support of asymmetric behavior, which is largely obscured at pump where prices include both tax and duty, no longer hold. Adopting a nonlinear Auto Regressive Distributive Lag (ARDL) framework, this paper also shows that studies that failed to account for the exchange rate as part of the marginal cost of importing oil for countries with a high oil import dependency ratio may be misleading. Specifically, the results indicate that once the exchange rate effect is taken into consideration, the possibility of rent-seeking behavior in the gasoline markets of Italy and Spain disappears, while the rockets and feathers effect in the ex-tax gasoline, diesel, domestic heating oil, and industrial fuel oil markets of France, Germany, Italy, and Spain vanishes. Finally, employing instrumental variables and generalized method of moment estimators, this paper further finds that the results are robust and free from endogeneity issues. [ABSTRACT FROM AUTHOR]