Working Paper: CEPR ID: DP2461
Authors: Carsten Detken; Philipp Hartmann
Abstract: This paper provides a broad empirical examination of the major currencies' roles in international capital markets, with a special emphasis on the first year of the Euro. A contribution is made as to how to measure these roles, both for international financing as well as for international investment. The times series collected for these measures allow for the identification of changes in the role of the Euro during 1999 compared to the aggregate of Euro predecessor currencies, net of intra-Euro area assets/liabilities, before stage 3 of EMU. A number of key factors determining the currency distribution of international portfolio investments, such as relative market liquidity and relative risk characteristics of assets, are also examined empirically. It turns out that for almost all important market segments for which data are available, the Euro immediately became the second most widely used currency for international financing and investment. For the flow of international bond and note issuance it experienced significant growth in 1999 even slightly overtaking the US dollar in the second half of the year. The Euro's international investment role appears more static though, since most of the early external asset supply in Euro is actually absorbed by Euro area residents.
Keywords: international capital markets; international currencies; euro; dollar; yen; EMU; capital flows; international monetary system; portfolio selection; money markets; bond markets; equity markets; bank lending
JEL Codes: F21; F32; G11; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| euro's depreciation after introduction (F36) | related to excess supply of euro-denominated bonds (G15) |
| factors influencing international portfolio choices (G15) | play a crucial role in determining euro's attractiveness compared to dollar and yen (F31) |
| introduction of the euro (F36) | euro becomes the second most widely used currency for international financing and investment (G15) |
| introduction of the euro (F36) | significant growth in euro-denominated bond issuance (G15) |
| significant growth in euro-denominated bond issuance (G15) | euro overtakes US dollar in bond issuance (G15) |