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Many of the problems associated with the United States attempting to unilaterally forbid the creation of Eurodollars could be mitigated by an international agreement prohibiting financial institutions from creating Eurocurrencies. First, an international agreement would make it much easier to wind down the market.
After all, Eurocurrencies do not just pose a threat to monetary sovereignty; they pose a threat to global financial stability.
Ultimately this would not be a problem if: (1) the market for Eurocurrencies was not so large that it posed systemic risk if it failed, and (2) Eurocurrencies were not completely beyond the control of the Federal Reserve.
1990) (discussing the reasons that Eurocurrencies can lead to inflation).
The term ([RP.sub.LIBOR,i] - [RP.sub.LIBOR,j]) in equation (8c) represents the difference in sovereign risk premia between the countries issuing underlying currencies i and j plus the difference in the aggregate credit risk premia between the sets of Eurobanks trading Eurocurrencies i and j.
where SovPI denotes the price index on sovereign bonds from countries denominating Eurocurrencies j and i expressed in numeraire currency j, EurBk is an index measure of bank credit risk for the sets of Eurobanks trading Eurocurrencies i and j, and DomBk is an index measure of bank credit risk for the sets of domestic banks dealing in the CD markets in countries i and j.
Initial examination of the table shows that the t-statistics for all Eurocurrencies are large and significant for both 1-month and 3-month maturities.
This indicates a structural difference and a lack of harmony between the intra-market pair of sovereign/credit risk premia for the two Eurocurrencies. For regression (11), [[gamma].sub.2] and [[gamma].sub.4] are significantly positive, indicating that the [pounds sterling] LIBOR/$ LIBOR risk premium spread increases with both an increase in UK/U.S.