Modeling the ECU against the US dollar: A structural monetary interpretation

The proposal that a reformed international monetary system be designed arou nd currency blocs has gained some popularity of late. In Europe, the format ion of the Euro formalizes the existence of a DM-based currency block. Litt le academic research has been conducted, however, on the properties of comp osite currencies such as the Euro. In this article, we examine the properti es of the precursor to the Euro-namely, the ECU-against the U.S. dollar usi ng a monetary framework. The article has several novel features: Our modeli ng strategy involves starting with underlying equilibrium conditions rather than a final reduced form; uses divisia money rather than the more convent ional simple-sum money; interprets, in an economic sense, the long-run rela tionships; and produces an appealing forecasting performance.