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Are Different-Currency Assets Imperfect Substitutes?

Listed author(s):
  • Martin D. D. Evans
  • Richard K. Lyons

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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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2003/wp-cesifo-2003-07/cesifo_wp978.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 978.

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