Are Different-Currency Assets Imperfect Substitutes?

44 Pages Posted: 31 Jul 2003

See all articles by Martin D.D. Evans

Martin D.D. Evans

Georgetown University - Department of Economics

Richard K. Lyons

University of California, Berkeley; National Bureau of Economic Research (NBER)

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

Evans, Martin D.D. and Lyons, Richard K., Are Different-Currency Assets Imperfect Substitutes? (July 2003). Available at SSRN: https://ssrn.com/abstract=427640 or http://dx.doi.org/10.2139/ssrn.427640

Martin D.D. Evans

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States
202-687-1570 (Phone)
202-687-6102 (Fax)

Richard K. Lyons (Contact Author)

University of California, Berkeley ( email )

Haas School of Business
Berkeley, CA 94720
United States
510-642-1059 (Phone)
510-643-1420 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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