DETERMINING THE VALUE OF A FINANCIAL UNIT OF ACCOUNT BASED ON COMPOSITE CURRENCIES - THE CASE OF THE PRIVATE ECU

The paper presents evidence from the past three years which indicates that the exchange rate between the private ECU and the official ECU Ba sket can deviate substantially from par. The value of the private ECU is driven by expectations that a future European Central Bank will enf orce par convertibility between the private ECU and the official ECU b asket of currencies. Meanwhile, no existing institutional arrangement limits the private ECU's value in terms of the Basket. This paper addr esses the question of what determines the values of the private ECU an d of private ECU interest rates. We show that an anticipation of a fut ure 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 priva te ECU exchange rate provides the template for how to determine the va lue of any private composite currency, such as, for example, a private SDR.