Liquidity and Exchange Rates: An Empirical Investigation / Charles Engel, Steve Pak Yeung Wu.

Format:

Book

Author/Creator:

Engel, Charles.

Contributor:

National Bureau of Economic Research.

Wu, Steve Pak Yeung.

Series:

Working Paper Series (National Bureau of Economic Research) no. w25397.

NBER working paper series no. w25397

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Liquidity and Exchange Rates

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

We find strong empirical evidence that economic fundamentals can well account for nominal exchange rate movements. The important innovation is that we include the liquidity yield on government bonds as an explanatory variable. We find impressive evidence that changes in the liquidity yield are significant in explaining exchange rate changes for all of the G10 countries. Moreover, after controlling for liquidity yields, traditional determinants of exchange rates - adjustment toward purchasing power parity and monetary shocks - are also found to be economically and statistically significant. We show how these relationships arise out of a canonical two-country New Keynesian model with liquidity returns. Additionally, we find a role for sovereign default risk and currency swap market frictions.

Notes:

Print version record

December 2018.