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Currency preferences and the Australian dollar

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  • Geoffrey Kingston

    (School of Economics, University of New South Wales)

  • Martin Melecky

    (School of Economics, University of New South Wales)

Abstract

We investigate the theory and empirics of currency substitution and currency complementarity. Analytical tractability is facilitated by focussing on a small currency. Data spanning 1985 to the turn of the century contain evidence of the Australian dollar’s substitution for the mark and complementarity with the yen, consistent with our theory that international variables will in general affect the demand for domestic money. Our theory also predicts third-currency effects, and the data reveal several of these. For example, rises in the US Federal Funds rate were associated with depreciations of the Australian dollar against the yen, controlling for the spread between interest rates in Australia and Japan.

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File URL: http://128.118.178.162/eps/if/papers/0502/0502006.pdf
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Bibliographic Info

Paper provided by EconWPA in its series International Finance with number 0502006.

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Length: 40 pages
Date of creation: 08 Feb 2005
Date of revision:
Handle: RePEc:wpa:wuwpif:0502006

Note: Type of Document - pdf; pages: 40
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Web page: http://128.118.178.162

Related research

Keywords: Atemporally non-separable preferences; Money demand; Cash in advance; Third-currency effects; Uncovered Interest Parity;

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References

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  12. Brittain, Bruce, 1981. "International Currency Substitution and the Apparent Instability of Velocity in Some Western European Economies and in the United States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 13(2), pages 135-55, May.
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  15. Traa, Bob M., 1985. "Indirect currency substitution : A structural approach," Economics Letters, Elsevier, vol. 18(2-3), pages 233-236.
  16. Clements, Kenneth W & Selvanathan, Antony & Selvanathan, Saroja, 1996. "Applied Demand Analysis: A Survey," The Economic Record, The Economic Society of Australia, vol. 72(216), pages 63-81, March.
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Cited by:
  1. Melecky, Martin, 2007. "A structural investigation of third-currency shocks to bilateral exchange rates," MPRA Paper 7402, University Library of Munich, Germany.
  2. Melecky, Martin, 2008. "An alternative framework for foreign exchange risk management of sovereign debt," Policy Research Working Paper Series 4458, The World Bank.
  3. Melecky, M, 2007. "Currency Preferences in a Tri-Polar Model of Foreign Exchange," MPRA Paper 4186, University Library of Munich, Germany.
  4. Fullerton, Thomas M., Jr. & Molina, Angel L., Jr. & Pisani, Michael J., 2009. "Peso Acceptance Patterns in El Paso," MPRA Paper 17900, University Library of Munich, Germany, revised 19 Jun 2009.
  5. André Mollick & Tibebe Assefa, 2013. "Carry-trades on the yen and the Swiss franc: are they different?," Journal of Economics and Finance, Springer, vol. 37(3), pages 402-423, July.

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