Determining the Value of a Financial Unit of Account Basedon Composite Currencies: The Case of the Private Ecu

By D. F. I. Folkerts-Landau, Peter M. Garber

June 1, 1994

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D. F. I. Folkerts-Landau, and Peter M. Garber Determining the Value of a Financial Unit of Account Basedon Composite Currencies: The Case of the Private Ecu, (USA: International Monetary Fund, 1994) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Evidence from the past three years indicates that the exchange rate between the private ECU and the official ECU Basket can deviate substantially from par. The value of the private ECU is driven by expectations that a future European Central Bank will enforce par convertibility between the private ECU and the official ECU basket of currencies. Meanwhile, no existing institutional arrangement limits the private ECU’s value in terms of the Basket. This paper addresses the question of what determines the values of the private ECU and of private ECU interest rates. We show that an anticipation of a future fixing of the private ECU’s value, together with the interest rate setting mechanism of the large-value ECU payment and clearing system, are sufficient to determine its value. The determination of the private ECU exchange rate provides the template for how to determine the value of any private composite currency, such as, for example, a private SDR.

Subject: Banking, Currencies, Currency markets, Exchange rates, Financial institutions, Financial markets, Foreign exchange, Futures, Money, Spot exchange rates

Keywords: Basket exchange market, Basket exchange rate, Core ECU bank, Currencies, Currency markets, ECU assets, ECU banking system, ECU clearing, ECU interest rates, ECU liability, ECU position, ECU securities, ECU yield, Exchange rates, Futures, Private ECU, Spot exchange rates, WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1994/072
Stock No:

WPIEA0721994
ISBN:

9781451959130
ISSN:

1018-5941

Notes

Also published in Staff Papers, Vol. 42, No. 1, March 1995.

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