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Currency Preferences in a Tri-Polar Model of Foreign Exchange

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  • Melecky, M

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.

Suggested Citation

  • Melecky, M, 2007. "Currency Preferences in a Tri-Polar Model of Foreign Exchange," MPRA Paper 4186, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:4186
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    File URL: https://mpra.ub.uni-muenchen.de/4186/1/MPRA_paper_4186.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Exchange Rate Modeling; Currency Substitution; Currency Complementarity; Third-Currency Effects;

    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

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