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An information approach to international currencies

  • Lyons, Richard K.
  • Moore, Michael J.

Models of currency competition focus on the 5% of trading attributable to balance-of-payments flows. We introduce an information approach that focuses on the other 95%. Important departures from traditional models arise when transactions convey information. First, prices reveal different information depending on whether trades are direct or though vehicle currencies. Second, missing markets arise due to insufficiently symmetric information, rather than insufficient transactions scale. Third, the indeterminacy of equilibrium that arises in traditional models is resolved: currency trade patterns no longer concentrate arbitrarily on market size. Empirically, we provide a first analysis of transactions across a full market triangle: the euro, yen and US dollar. The estimated transaction effects on prices support the information approach.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 79 (2009)
Issue (Month): 2 (November)
Pages: 211-221

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Handle: RePEc:eee:inecon:v:79:y:2009:i:2:p:211-221
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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