Financial integration and currency risk premium in CEECs: Evidence from the ICAPM

This paper aims to study the Central and Eastern European Countries' (CEECs) dynamics of financial integration in the euro area with the prospect of their integration into the European Monetary Union. Our empirical analysis is based, successively, on a MGARCH model with time-varying correlations, a state-space model and a Markov-switching model. The results show that financial integration (i) is not perfect but is increasing and (ii) is linked to currency stability. The growing financial integration in 2007–2009 seems to be rather the result of the shock propagated by the global crisis.     

Is an ECU parallel currency the way to achieve European monetary integration?

A very lively debate has now developed about the future of European monetary policy. Dr. Peter Bofinger analyses the arguments for and against the promotion of the ECU as a parallel currency.     

Price‐level co‐movements within currency unions: An alternative integration metric

This paper analyses currency union integration by testing whether price levels in member countries possess a common stochastic trend. The trace statistic test for cointegration proposed by (Johansen, 1995) demonstrates the presence of such a trend for most unions. A disaggregated analysis identifies a common stochastic trend for several though fewer than half of country pairs within a union. Some unions such as the Eurozone have small shares of cointegrated country pairs. Yet, the share of cointegrated country pairs is large relative to countries outside currency unions. Comparison to a control group (country pairs where one country belongs to a given union and the other country does not) indicates that the cointegration found within a currency union is a union‐specific trait and not a feature of the individual countries within the union. These results provide an alternative metric to intraunion trade for gauging the extent of currency union integration.     

东亚区域货币合作与人民币的核心竞争力分析

随着《清迈协议》的签订,东亚货币一体化正式进入区域货币合作阶段。根据“最适度货币区”理论,在区域货币合作中,需要有一种占主导地位的货币,在货币合作中起支撑作用。东亚各国(地区)货币中,日元由于种种原因,难成区域性主导货币(核心货币)。由于人民币近年来的不俗表现,其竞争力不断增强,将最有条件成为区域货币中的中坚力量。     

Problems of integration theory in relation to the developing countries

The opportunities for the integration of developing countries and the limitations to such integration have not received enough attention in the scientific discussion on the reform of the international economic order, with the result that a considerable research backlog has been accumulating in this field. The following article shows that the established integration theory which has been evolved primarily with the problems of the European integration movement in mind is not able to evolve adequate criteria for decisions on integrations of developing countries.     

Local currency systemic risk

Emerging country governments increasingly issue local currency denominated bonds and foreign investors have been increasing their holdings of these assets. By issuing debt denominated in local currency, emerging country governments eliminate exchange rate risk. The growing stock of local currency government debt in the financial portfolios of foreign investors increases their diversification and exposure to fast growing economies. In this paper, we highlight some of the risks associated to this recent trend. First, we adopt the CoV aR risk-measure to estimate the vulnerability of individual countries to systemic risk in the market for local currency government debt. Second, we show that our country-level estimates of vulnerability increase with the share of local currency debt held by foreign investors. A version of the old adage “When New York sneezes, London catches a cold,” used often to describe the relationship between the stock markets in these two cities, still applies between individual emerging countries and the aggregate market for local currency government debt.     

Behavior of output during currency crises

This paper documents the behavior of output and its association with other macroeconomic variables in 195 episodes of currency crises in developing countries during 1970-2000. We find that about 60% of the crises are contractionary, while the rest are expansionary. Crises are one and a half times more likely to be contractionary in emerging markets than in other developing economies. The number of contractionary crises or their severity does not increase in the 1990s. Economies which experience capital inflows in the years prior to the crisis or an increase in external debt burden during the crisis are more likely to slow down during crises, while those with restrictions on capital flows prior to the crisis or are more open to international trade are less likely to do so. The results are robust to different ways of measuring changes in output during crises.     

An information-based theory of international currency

This paper develops an information-based theory of international currency based on search frictions, private trading histories, and imperfect recognizability of assets. Using an open-economy search model with multiple competing currencies, the value of each currency is determined without requiring agents to use a particular currency to purchase a country's goods. Strategic complementarities in portfolio choices and information acquisition decisions generate multiple equilibria with different types of payment arrangements. While some inflation can benefit the country issuing an international currency, the threat of losing international status puts an inflation discipline on the issuing country. When monetary authorities interact in a simple policy game, the temptation to inflate can lead optimal policy to deviate from the Friedman rule. The calibrated model can produce a welfare cost of losing international status for the issuing country larger than previous findings, though estimates depend critically on inflation rates and information costs.     

Consumers and the single currency

The introduction of the notes and coins of the new currency will for consumers be the most visible sign of the existence of the European Union. The object of this article is to examine the practical problems of their introduction for consumers. A Green Paper issued by the European Commission calls for the setting up of numerous dialogue and co-operation structures, in particular national pilot structures. Consumer organisations will have a decisive role in these structures. The introduction of the single currency is a major challenge, for the years to come, for all those concerned with consumers' daily lives. The extent of this challenge may not have been correctly perceived.

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Die Verbraucher und die gemeinsame Europäische Währung

Zusammenfassung Die Einführung der Geldscheine und Münzen der neuen europäischen Währung wird für die Verbraucher das äußerlich am besten sichtbarer Zeichen für die Existenz der Europäischen Uunion sein. Der Beitrag behandelt die praktischen Probleme, die die Einführung der neuen Währung für die Verbraucher mit sich bringt. Ein von der Kommission in Auftrag gegebenes Grünes Papier fordert die Schaffung zahlreicher Strukturen für Dialogue und Zusammenarbeit, insbesondere auf nationaler Ebene. Verbraucherorganisationen sollten in diesen Strukturen eine entscheidende Rolle spielen. Die Einführung der einheitlichen Währung ist in den nächsten Jahren eine große Herausforderung für all jene, die sich mit dem Alltag der Konsumenten beschäftigen. Das Ausmaß dieser Herausforderung ist wohl nicht angemessen vorhergesehen worden.

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Jean Allix is Principal Administrator, DG XXIV Consumer Policy, European Commission, Rue de la Loi 200, B-1049 Brussels, Belgium. This paper has previously appeared in French in INC Hebdo Special Europe, 30.6.1995. The views expressed are those of the author and not necessarily those of the Commission.