NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Private ECU: A Currency Floating on Gossamer Wings

David Folkerts-Landau, Peter M. Garber

NBER Working Paper No. 4017
Issued in March 1992
NBER Program(s):International Finance and Macroeconomics

Today's value of the private ECU is driven by expectations that a European monetary authority will at some future date declare itself willing to convert the private ECU into the official basket at par. Until then, its value is not limited by any existing institutional arrangements in the European Communities, such as the Exchange Rate Mechanism of the European Monetary System. We address the question of what determines the exchange rate between the private ECU and the official Basket, and what determines ECU interest rates. The Bank for International Settlements sets the ECU overnight interest rate on clearing balances as a weighted and lagged average of the money-market rates in the EC currencies, thereby fixing a point on the ECU term-structure. This exogenous fixing of the ECU interest rate and the expectation of a future fixing of the exchange rate satisfy the fundamental requirements for a obtaining a determinate real value of what is otherwise an undefined private ECU unit of account.

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Document Object Identifier (DOI): 10.3386/w4017

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