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N° 1998 - 04 |
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| August |
| Pegging the CEEC's Currencies to the Euro |
Agnès Bénassy-Quéré
Amina Lahrèche-Révil |
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Existing work on the potential role of the
euro as an international currency generally focuses on the means-of-payment and
store-of-value functions. The unit-of-account function is often left aside, perhaps
because trade invoicing is especially subject to inertia, due to network externalities,
or because this function is considered to be a consequence of other functions.
However the unit-of-account function also includes the use of an international currency as a monetary anchor. This function is crucial for the internationalisation process since it determines the risk of using an international currency for other functions. In addition, pegging the national currency to a foreign anchor is a centralised decision that can be taken relatively quickly, unlike private decisions which are decentralised and subject to strong externalities.
In the short run, the euro will hardly compete with the dollar as a world anchor. This is because the choice of a monetary anchor is related to real integration. For instance, it makes little sense for Mexico or Canada to peg their currencies to the euro, since most trade and capital flows are carried out with the United States. Still, the euro could emerge as a regional anchor, in the area surrounding the eleven countries initially constituting the euro-zone. This paper studies whether Central and Eastern European Countries (CEECs) will have an incentive to peg their currencies to the euro.
In the first section, we study whether the behaviour of CEECs' currencies over 1992-1996 matches the theory of optimal currency areas. Adapting a cross-section estimation method initiated by Bayoumi and Eichengreen (1997), we show that in the CEECs, nominal exchange rate variability against the dollar has generally been too small compared to what would have been required by an optimal currency area standard, estimated on a 49 country sample. In fact, this standard indicates that the CEECs should stabilise their currencies more against the euro than against the dollar.
The second section proposes a theoretical model for the choice of a real basket peg, when public authorities encounter an external financial constraint. Calibrating the model shows that the CEECs will have an incentive to peg their currencies in real terms to the euro or to baskets in which the euro is prominent, whether or not they can co-operate with each other. |
Abstract |
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| optimum currency areas, international currencies,
monetary pegs, Central and Eastern European countries |
Keywords |
| F31, F33, F36 |
JEL classification |
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