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Currency preferences and the Australian dollar

Author

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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.

Suggested Citation

  • Geoffrey Kingston & Martin Melecky, 2005. "Currency preferences and the Australian dollar," International Finance 0502006, EconWPA.
  • Handle: RePEc:wpa:wuwpif:0502006
    Note: Type of Document - pdf; pages: 40
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Martin Melecky, 2008. "A Structural Investigation of Third-Currency Shocks to Bilateral Exchange Rates," International Finance, Wiley Blackwell, vol. 11(1), pages 19-48, May.
    2. Wang, Xi & Yang, Jiao-Hui & Wang, Kai-Li & Fawson, Christopher, 2017. "Dynamic information spillovers in intraregionally-focused spot and forward currency markets," Journal of International Money and Finance, Elsevier, vol. 71(C), pages 78-110.
    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;Academy of Economics and Finance, vol. 37(3), pages 402-423, July.
    6. Melecky, Martin, 2008. "An alternative framework for foreign exchange risk management of sovereign debt," Policy Research Working Paper Series 4458, The World Bank.

    More about this item

    Keywords

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

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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