Co-movements of non-Euro EU currencies with the Euro

•A model of cross-elasticity of exchange rates is proposed and tested for non-euro EU currencies•High substitution with the euro is found for the currencies of Denmark, Sweden, Poland, Czech Rep., Hungary and Romania•Substitution is lower for the British Pound•Cross-elasticity increased during the 2008-2010 financial crisis

This paper examines co-movements of non-euro EU Members' currencies and the euro during the 2000-2015 sample period. We propose a model of cross-elasticity of exchange rates and perform the Bai-Perron multiple break points, GARCH and BVAR estimations on the daily data series. The results show high positive cross-elasticity (co-movements) between the euro and the currencies of Denmark, Sweden, Poland, the Czech Republic and Hungary. For the Romanian lei, cross-elasticity with the euro is initially nonexistent but subsequently it is steadily increasing over the sample period. This implies a strong substitution between these currencies and the euro in foreign exchange markets. In contrast, cross-elasticity between the British pound and the euro is considerably lower. For all examined non-euro currencies substitution with the euro increases substantially during the 2008-2010 global financial crisis.