Yes / Although the eurozone sovereign debt crisis took many by surprise following the Global Financial Crisis induced Great Recession, this chapter argues that this was an accident waiting to happen with unjustified emphasis placed upon unproven rules and institutions derived from contemporary neoliberal macroeconomic thinking. First, recent developments in macroeconomic are discussed and evaluated in terms of the so-called New Consensus Macroeconomics (NCM) that forms the current mainstream macroeconomic model comprising a blend of New Classical and New Keynesian theories is through adopting the rational behaviour hypothesis and supply-side-determined long-term equilibrium of output. A particular feature of these ideas is the inclusion of rules and institutions that are perceived to result in time consistent policymaking through essentially binding politicians from undertaking in non-optimal behaviour for either opportunistic, partisan or non-rational expectations reasons. Second, in addition to the general backdrop of macroeconomics the chapter considers the notion of a monetary union between countries under the rubric of both exogenous and endogenous Optimum Currency Area (OCA) theory. This combination of theoretical propositions form the bedrock of the eurozone where the TEU convergence criteria and SGP form the rules, while the European Central Bank is the key institution tasked with delivering low and stable price inflation. However, although these notions have become the staple diet of a generation of mainstream economists they comprehensively failed to insulate the eurozone from its sovereign debt crisis. / Full text of this chapter will be released for public view at the end of the publisher embargo on 1 Nov 2019.

Since the end of World War II, foreign direct investment (FDI) has been leading the international financial capital flows and has tripled in 2000s over the decade earlier. With its positive effect on economic growth of host countries via spill-overs, it became a race among countries to attract multinational enterprises (MNEs) to invest in their countries. The introduction of European common currency theoretically helps reduce the transaction costs across borders with the reduction of exchange-rate uncertainties and associated costs of hedging, facilitation of international cost comparison. Moreover, mergers and acquisitions activities (M&As) account for 60-80% of FDI flows, and most MNEs engage in both export and setting up affiliates abroad, suggesting complementarity between trade and FDI. Thus reducing cross-border distance costs would encourage MNEs to increase its M&A activities abroad, resulting in more inward FDI flows in the eurozone, especially among member states. The gravity equation is used in this paper to estimate the euro effect from the dataset of inward FDI flows of 24 countries during 1993-2007 and the result confirms that common currency stimulates more intra-eurozone inward FDI flows by approximately 58%.

The use of currency options has been grown widely during the latest years. This paper tries to answer whether hedge strategies using currency options are superior to forward exchange contracts or not.

Previous studies have identified that the use of currency derivatives in order to minimize the risk involved with foreign trade can also increase a firm’s value. Evidence of this can be found in a paper such as Allayannis and Weston (2001) “Use of Foreign Derivatives and Firm Market Value”, which showed that companies in the U.S. that uses these currency derivatives has a higher firm value than companies that do not use them. However, there have not been any studies concerning the Swedish market. This is why the Swedish market is selected for this thesis but also since the Swedish market is a more open market than the U.S. market for instance. The more open, the more volatile is the exchange rate, which one could see as a reason to why Swedish companies should hedge even more. The purpose of this thesis is to analyze the Swedish market and to find out if there is a relation between the firm value and hedging, analyzed with help of Tobin’s Q that gives us a measurement of the firm’s underlying value. The analysis is done on the 50 largest companies in Sweden, although some of the companies are ranked lower in the category total asset but since not all of the 50 largest companies met the requirements, the selection had to go further down the list. The data is received from the companies annual reports (2005), this to receive the latest data. The companies are analyzed with help of Tobin’s Q and also EBIT (Earnings Before Interest and Tax), this to get a measurement of how the market value of the companies was towards each others with pr without hedging. The result is presented in the analyze and shows that there is no relation between firm value and hedging, at least not in this research and with this selection of companies in the Swedish market. This result contradicts the findings in the paper made on the U.S. market.

This thesis investigates in what way trade flows in Europe have been altered and differ for countries belonging to a preferential trade agreement as well as a common currency area. More specifically, how exports among the European countries are affected by memberships with the European Union and the EMU. A total of 72 countries have been chosen which represents the main trading partners between the EU and the rest of the world. Out of these 72 countries, 25 represent EU members which include 12 EMU member countries. The econometric analysis employ a gravity model with 18 variables in order to determine their impact on trade flows. This is done through a regression with a log-log equation where the dependent variable is export. The other variables included are chosen to explain export flows among the EU members as well as their trade with EMU countries and the rest of the world. Furthermore, variables representing trade affinities are included to determine whether or not they have a significant effect on trade. The regression is divided into four time periods in order to more easily determine how the trade pattern in Europe have altered from the establishment of the EU and the EMU. The first time period represent an early state of EU membership, the second a mature state of EU membership, the third when EU was reformed and the fourth an early state of EMU membership. The regression results illustrate that the majority of the selected variables are significant but most importantly that the trade affinity variables are proven to have an impact on trade flows. The results also show that trade has increased and that in the case of EU membership it is more profitable to join than to remain outside. Moreover, the result show in par-ticular that countries that belong to the EMU have a stronger orientation of their exports to the rest of the world then other EU countries. For the latter, the European market is of prime importance.

If there is currency substitution, the central bank will lose independence in monetary policy even if the flexible exchange rate system is adopted. In this paper, we investigate the existence of currency substitution between Taiwan and the United States in an open economy during the period of the managed floating exchange rate system, and examine the role of the factor influencing monetary policy and domestic money demand function derived from a small-country portfolio balance approach. To take account of currency substitution, we use quarterly data over 1981-2005 period on the demand for money and include data on the real exchange rate in addition to real income, domestic nominal interest rate and foreign nominal interest rate. The methodology is based on an application of the Johansen and Juselius¡]1990¡^cointegration technique. Also use error correction model to discuss short-run dynamic adjustment processes of these variables. Application of the Augmented Dickey-Fuller test and Phillips-Perron test indeed reveal that all variables are integrated of order one. The result from the Johansen¡¦s maximum likelihood mehtod reveal that there is only one cointegrating vector among the variables. This implies that there is long-run equilibrium relationship among the variables. There is clear evidence that demand for money is affected not only by changes in domestic variables such as real income, domestic nominal interest rate but also by fluctuations in foreign nominal interest rate and real exchange rate. And the coefficiect of the real exchange rate is negative and statistically significant. That means currency substitution is significant factor in the domestic money demand equation and currency substitution indeed exists in Taiwan. This paper successfully provides a consistent result, currency substitution indeed exists in Taiwan. Therefore, to have an effective monetary policy, the monetary authorities should take into account the international factors.

Since the Euro has founded in 1999, the Asian Currency has become an important issue. The most important prerequisite for adopting common currency for the countries in the area is the synchronization of business cycle. This paper analyses the degree and responses of business cycles for Asian countries when they face to the common shocks. The empirical findings from this paper can be summarized as follows. First, the shocks of Japanese economy are more important to Asian countries than the shocks from the United States, except for Thailand and Indonesia. Second, Malaysia and the Philippine are substantially influenced by the Thailand. Therefore, the Asian economy is evidently forming its regional (or bloc) economy continually. The findings from this paper are in the same line with the result from Hazel (2001), who concludes the business cycles of Japan and Korea are commoved. The degree of synchronization of business cycles for Thailand, Malaysia, and the Philippine are quite high as well.

Little research has been done into implied correlations, and the small literature grows even smaller when referring to currency options. The existing literature has established that implied correlation is a good if not the best forecaster of future realized correlation, and that this ability to forecast is not necessarily universal. This paper will establish that the forecasting ability of implied correlations in currency options varies across currency pairs, thus proving that not all implied correlations are created equal. Using two different proxies for the quality of the forecaster, the paper attempts to explain which characteristics of an option on a currency pair affect the variation in forecasting ability.

A gravity model is used to evaluate the effects of currency union on intra-regional trade of ECOWAS (Economic Community of West African States) member states. The panel data used includes bilateral observations for fourteen years spanning 1994 through 2006 for 16 countries. Controlling for determinants and deterrents of trade, I find the presence of a currency union three times as likely to increase intra-regional trade between ECOWAS member countries. In addition, I find that the effect on trade creation has been steadily falling since 1994.

This thesis investigates the cause and implications of the divergent inflationrates of the EMU-12 countries between the years 1998 and 2010. The EMUand the euro are put into a context with the classic theory of Optimum CurrencyArea, where the economic benefits and cost of joining a monetary unionis reviewed. The inflation divergence in the euro area is then described and investigated.Empirically, a Phillips Curve model is constructed in order to determineif the EMU-12 nations’ inflation rates are equally sensitive to changesin unemployment as the EMU average. This is done using a Panel Least Squareestimation for the EMU-12. Each nation is then tested separately against theEMU average. The result provides evidence that the EMU-12 nations’ inflationrates are not equally sensitive to changes in unemployment as the EMU average.The result is negative for the EMU-12 in an Optimum Currency Area context.Given the results, the EMU-12 cannot be considered to be an OptimumCurrency Area, at least not yet.