Euro-Market Expansion: Macroeconomic Concerns, Theoretical Models and Preliminary Empirical Estimates

Abstract

By the standards of most national financial aggregates the growth of the Euro-market has been quite remarkable. During the last decade the market expanded at a rate of around 25 per cent per annum and by end-1980 the gross foreign currency liabilities of banks in Europe exceeded $1,000 billion. The reasons for this expansion and its macroeconomic implications are subjects of interest and a continuing source of concern among various national authorities. There are, however, important disagreements about the theoretical processes involved and detailed empirical analysis of the issues is almost completely absent. This paper attempts to draw out some of the relationships between macroeconomic concerns about the Euro-market and the model frameworks which are used to explain its growth (section 3), and to examine the reasons for non-US non-bank transactions in Euro-dollars within the framework of a simple theoretical and empirical model (section 4). The preliminary regression analysis of a pooled cross-country and time series sample finds that trade variables, income growth, relative interest rates and national monetary disturbances are the major determinants of non-banks’ holding and borrowing of Euro-dollars. The significance of the Euro-dollar market is seen in terms of its role in financing external transactions and as a source and outlet for liquidity in the domestic economy. The analysis begins, in section 2, with a comment on the content of Euro-currency statistics.