Exchange Rate Volatility and Local Currency Internationalization: An Empirical Study on the Australian Dollar
The Studies of International Finance (《国际金融研究》) in April, 2013 (in Chinese)
14 Pages Posted: 16 Sep 2012 Last revised: 6 May 2013
Date Written: August 20, 2012
This paper specifies the benchmark regression model of the Australian dollar internationalization based on the long-run determinants of local currency internationalization, and investigates the empirical relationship between AUD exchange rate volatility and its internationalization in the period 1993Q4-2012Q1. We find that the greater exchange rate volatility of the AUD against the USD has a large but significantly negative effect on AUD internationalization. Keeping all else equal, an increase in exchange rate volatility of the AUD against the USD by one standard deviation will lead to a 1% decrease in the degree of AUD internationalization. Controlling for the impacts of the once-in-a-century global financial crisis, European debt crisis, inflation differential and investment growth deviation, the above result still holds. The results of the paper are robust to different econometric estimators (OLS and 2SLS) and different exchange rate volatility measures. This paper produces the first robust evidence on the lower degree of AUD internationalization, and offers an important reference for RMB internationalization.
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Keywords: Exchange Rate Volatility, Local Currency Internationalization, AUD
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