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A new technique for estimating currency premiums

Author

Listed:
  • Kei Imakubo

    (Bank of Japan)

  • Koichiro Kamada

    (Bank of Japan)

  • Kazutoshi Kan

    (Bank of Japan)

Abstract

This paper extends the model of currency premiums developed by Clarida (2012, 2013). In our extended model, a currency premium consists of two disequilibrium factors: One is the interest rate gap, i.e., the deviation of real interest rates, domestic and foreign, from their equilibrium values; the other is the exchange rate misalignment, i.e., the deviation of real exchange rates from their equilibrium values. This paper calculates these disequilibrium factors included in the dollar, euro, and yen, and shows empirically the developments of the currency premiums from the mid-2000s. The result indicates that the euro was growing to become a world currency next to the US dollar toward the late 2000s, and then the yen was preferred as a safe haven while the US and European capital markets were under stresses.

Suggested Citation

  • Kei Imakubo & Koichiro Kamada & Kazutoshi Kan, 2015. "A new technique for estimating currency premiums," Bank of Japan Working Paper Series 15-E-9, Bank of Japan.
    • Handle: RePEc:boj:bojwps:wp15e09
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    File URL: http://www.boj.or.jp/en/research/wps_rev/wps_2015/data/wp15e09.pdf
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    References listed on IDEAS

    as
    1. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    2. Mr. Ronald MacDonald & Mr. Peter B. Clark, 1998. "Exchange Rates and Economic Fundamentals: A Methodological Comparison of BEERs and FEERs," IMF Working Papers 1998/067, International Monetary Fund.
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    Cited by:

    1. Beirne, John & Sugandi, Eric, 2023. "Risk-off shocks and spillovers in safe havens," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).

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    More about this item

    Keywords

    interest rate parity; purchasing power parity; currency premium; misalignment;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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