The Re-Emerging Privilege of Euro Area Membership

July 18, 2017

Preview Citation

Format: Chicago

Johannes Wiegand. The Re-Emerging Privilege of Euro Area Membership, (USA: International Monetary Fund, 2017) accessed November 23, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

When the euro was introduced in 1998, one objective was to create an alternative global reserve currency that would grant benefits to euro area countries similar to the U.S. dollar’s “exorbitant privliege”: i.e., a boost to the perceived quality of euro denominated assets that would increase demand for such assets and reduce euro area members’ funding costs. This paper uses risk perceptions as revelaed in investor surveys to extract a measure of privilege asscociated with euro membership, and traces its evolution over time. It finds that in the 2000s, euro area assets benefited indeed from a significant perceptions premium. While this premium disappeared in the wake of the euro crisis, it has recently returned, although at a reduced size. The paper also produces time-varying estimates of the weights that investors place on macro-economic fundmentals in their assessments of country risk. It finds that the weights of public debt, the current account and real growth increased considerably during the euro crisis, and that these shifts have remained in place even after the immediate financial stress subsided.

Subject: Credit ratings, Currencies, Exchange rate arrangements, Foreign exchange, Labor, Money, Public debt, Unemployment rate

Keywords: Area membership, Area privilege, Credit ratings, Currencies, Euro, Euro adoption, Euro area, Euro crisis, Euro premium, Europe, Exchange rate arrangements, Exorbitant privlege, Governance framework, Investor perception, Investor perceptions, Membership premium, Time dummy, Unemployment rate, WP

Publication Details

Pages:

20
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/162
Stock No:

WPIEA2017162
ISBN:

9781484309254
ISSN:

1018-5941

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