Working Paper: CEPR ID: DP1732
Authors: Maurice Obstfeld
Abstract: This paper analyses the constraints European Union law places on the 1 January 1999 choices of irrevocably fixed conversion rates between the euro and the currencies of EMU members states. Current EU legislation, notably the Maastricht Treaty, requires that the bilateral currency conversion factors implied by the 1 January 1999 choices equal closing market exchange rates on 31 December 1998. Given that legal constraint, there still exist several strategies for choosing the relative prices of EMU member currencies against the euro. Unfortunately, most of these have potentially damaging side effects. One approach, based on official Stage 2 offers of contingent euro forward contracts with value dates at the start of Stage 3, allows a highly credible preannouncement of the bilateral currency conversion factors to be set at the start of EMU. That approach assumes, however, that no prospective EMU members can withdraw between their selection in May 1998 and the start of Stage 3.
Keywords: euro; EMU; European System of Central Banks; Maastricht Treaty
JEL Codes: E42; F31; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Maastricht Treaty (F15) | conversion rates (Y10) |
| legal constraints (K12) | conversion rates (Y10) |
| market behavior (D40) | expected conversion rates (F31) |
| central banks intervention (E58) | stabilization of conversion rates (E63) |
| expected conversion rates (F31) | market outcomes (P42) |