Currency Preferences in a Tri-Polar Model of Foreign Exchange

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Currency Preferences in a Tri-Polar Model of Foreign Exchange

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Melecky, M

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Martin Melecký

Abstract

This paper reopens the subject of currency preferences while modeling the exchange rates among three major currencies - the US dollar, the euro and the Japanese yen. The exchange rate model presented in this paper includes not only traditional determinants of bilateral exchange rates but incorporates third-currency effects in addition. The obtained estimation results are interpreted from the perspective of possible currency substitution and complementarity relationships. We find evidence of currency complementarity between the yen and the euro, and currency substitution of the dollar for both the euro and the yen. The estimated third-currency effects are consistent with our findings on currency substitution and complementarity among the three major currencies.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 4186.

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Date of creation: Apr 2007
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Handle: RePEc:pra:mprapa:4186

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Find related papers by JEL classification:
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
F31 - International Economics - - International Finance - - - Foreign Exchange

This paper has been announced in the following NEP Reports:

NEP-ALL-2007-07-27 (All new papers)
NEP-CBA-2007-07-27 (Central Banking)
NEP-IFN-2007-07-27 (International Finance)
NEP-MON-2007-07-27 (Monetary Economics)

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