Are Different-Currency Assets Imperfect Substitutes?
44 Pages Posted: 31 Jul 2003
Date Written: July 2003
Abstract
This paper provides a new test for whether different-currency assets are imperfect substitutes. The test exploits the fact 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).
JEL Classification: F31, G12, G15
Suggested Citation: Suggested Citation
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