Creating a Single European Currency

One of the biggest financial events in recent history has been the creation of a single European currency, the euro, and Mathematica smoothed the transition.

To begin the shift, the European Union created an exchange-rate system that requires the value of a currency to remain between narrow bands known as target zones.

Dr. Colin Rose¹ used Mathematica to model target-zone exchange rates.

"Modeling exchange rates in bands is a bit like modeling the path of a drunk man walking down a narrow alley. It's nonlinear and difficult to work with. Previous attempts at doing this had been very complex, but in Mathematica it's delightfully easy. In fact, I think I did it with three lines of code!"

The exchange rates can collapse when speculators attack the regime. Speculators attack when they believe that the government will run out of reserves. They purchase the remaining reserves, which can cause exchange rates to collapse. In 1992 such speculative attacks obstructed attempts to switch to a single European currency. If the central banks can predict such attacks, they can prevent these collapses. Dr. Rose and Dr. Patrick Asea² used Mathematica to design a model that enables central banks to predict and describe this speculative behavior.

"The neat thing about working with Mathematica is that it brings models to life--it makes them interactive and dynamic. One can nudge a parameter a bit this way or that way and instantly see what effect it has. That's a wonderful advantage."

1. Dr. Colin Rose is the director of the Theoretical Research Institute in Sydney, Australia.

2. Dr. Patrick Asea is an assistant professor of economics at UCLA.