SFB 303 Discussion Paper No. B-169

Author: Klein, Martin
Title: ECU Bond Prices: Private Markets and Political Constraints
Abstract: Under the existing statutes of the European Monetary System (EMS) the European Currency Unit (ECU) is a "mixed bag" of economic and political elements. On the one hand it is simply a portfolio of EMS member currencies, on the other hand it is supposed to reflect the relative econimic strength of the ECU member countries. The implicit conflict between these two aspects gives rise to periodical readjustments of the ECU basket. The present paper analyzes the behavior of ECU bond prices under state-contingent basket readjustments, i.e. those that could be triggered by the evolution of the member curencies' cross exchange rates. We discuss the problems that arise and develop a non-linear pricing formula that can be applied in this context.
Keywords: European Currency Unit (ECU), European Monetary System (EMS), currency basket, interest rates
JEL-Classification-Number: 026, 313, 521
Creation-Date: October 1990
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