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Are Different-Currency Assets Imperfect Substitutes?

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  • Martin D. D. Evans
  • Richard K. Lyons

Abstract

This paper provides a new test for whether different-currency assets are imperfect substitutes. The test exploits that under floating rates, changing public currency demand has no direct effect on monetary fundamentals, current or future. Price effects from imperfect substitutability are clearly present: the immediate price impact of public trades is 0.44 percent per 1 billion dollar (of which, about 80 percent persists indefinitely). This estimate is applicable to intervention trades in the special case when they are indistinguishable from private trades (i.e., when interventions are sterilized, anonymous, and provide no monetary-policy signal).

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 978.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_978

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Citations

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Cited by:
  1. Lukas Menkhoff, 2008. "High-Frequency Analysis of Foreign Exchange Interventions: What do we learn?," CESifo Working Paper Series 2473, CESifo Group Munich.
  2. Richard W. Evans, 2007. "Is openness inflationary? Imperfect competition and monetary market power," Globalization and Monetary Policy Institute Working Paper 01, Federal Reserve Bank of Dallas.
  3. Peter Bofinger & Timo Wollmershäuser, 2003. "Managed Floating as a Monetary Policy Strategy," Economic Change and Restructuring, Springer, vol. 36(2), pages 81-109, June.
  4. M. Kayalica & Sajal Lahiri, 2005. "Strategic Environmental Policies in the Presence of Foreign Direct Investment," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 30(1), pages 1-21, January.
  5. Pasquariello, Paolo, 2007. "Informative trading or just costly noise? An analysis of Central Bank interventions," Journal of Financial Markets, Elsevier, vol. 10(2), pages 107-143, May.
  6. Josh Ederington & Arik Levinson & Jenny Minier, 2003. "Footloose and Pollution-Free," NBER Working Papers 9718, National Bureau of Economic Research, Inc.
  7. Per G. Fredriksson & John A. List & Daniel L. Millimet, 2003. "Chasing the Smokestack: Strategic Policymaking With Multiple Instruments," NBER Working Papers 9801, National Bureau of Economic Research, Inc.
  8. Timo Wollmershäuser, 2003. "Sterilisierte Devisenmarktinterventionen - ein umstrittenes währungspolitisches Instrument," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 56(19), pages 34-44, October.
  9. Taylor, Mark P. & Schmidt, Markus & Reitz, Stefan, 2007. "End-user order flow and exchange rate dynamics," Discussion Paper Series 1: Economic Studies 2007,05, Deutsche Bundesbank, Research Centre.

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