The Revived Bretton Woods System seen from the Benches - Lessons for Europe from a Three-Asset-Portfolio Model
The paper develops a three-asset-portfolio model to analyse consequences of foreign exchange market operations by Asian central banks on the exchange rates between euro, dollar and yen. Both an analytical as well as a graphical solution is presented. It is found that -- contrary to public belief -- the purchase of dollar assets by Asian central banks strengthens the dollar against both euro and yen. A diversification of Asian central bank reserves from dollar into euro would weaken the dollar against both other currencies. Thus, such a diversification would be incompatible with Asian currency pegs. However, it is shown that Asian central banks could alter their relative portfolio composition while keeping the peg intact if they would shift from intervening against the dollar into intervening against the euro.
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- Dominguez, Kathryn M & Frankel, Jeffrey A, 1993. "Does Foreign-Exchange Intervention Matter? The Portfolio Effect," American Economic Review, American Economic Association, vol. 83(5), pages 1356-1369, December.
- Mark P. Taylor & Lucio Sarno, 2001.
"Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?,"
Journal of Economic Literature,
American Economic Association, vol. 39(3), pages 839-868, September.
- Sarno, Lucio & Taylor, Mark P, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective, and, If So, How Does It Work?," CEPR Discussion Papers 2690, C.E.P.R. Discussion Papers.
- Gandolfo, Giancarlo & Goldberg, Michael D., 2005. "International Finance And Open-Economy Macroeconomics," Macroeconomic Dynamics, Cambridge University Press, vol. 9(02), pages 263-266, April.
- Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The Revived Bretton Woods System: The Effects of Periphery Intervention and Reserve Management on Interest Rates & Exchange Rates in Center Countries," NBER Working Papers 10332, National Bureau of Economic Research, Inc.
- Michael P. Dooley & David Folkerts-Landau & Peter M. Garber, 2005.
"An essay on the revived Bretton Woods system,"
Federal Reserve Bank of San Francisco, issue Feb, pages -.
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