The Emergence of the Euro as an International Currency.

The Europpean Union will enter stage three of Economic and Monetary Union (EMU) in 1999. The development of euro financial markets and thickness externalities in the use of the Euro as a means of of payment will be the major factors determining the importance of the euro as an international currency. As euro securities markets become deeper and more liquid and transaction costs fall, euro assets become more attractive, and the use of the euro as a vehicle currency will expand; the two effects interact, as we demonstrate. We use a three-region world model as a famework for alternative steady-state scenarios.