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Currency preferences and the Australian dollar

  • Kingston, Geoffrey
  • Melecky, Martin

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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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 26 (2007)
Issue (Month): 3 (April)
Pages: 454-467

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Handle: RePEc:eee:jimfin:v:26:y:2007:i:3:p:454-467
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  1. Michael D. Bordo & Ehsan U. Choudhri, 1980. "Currency Substitution and the Semand for Money: Some Evidence for Canada," UCLA Economics Working Papers 190, UCLA Department of Economics.
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