Liquidity and Exchange Rates: An Empirical Investigation

• 成果类型: Article
• 署名作者: Engel, Charles; Wu, Steve Pak Yeung
• 署名单位: University of Wisconsin System; University of Wisconsin Madison; National Bureau of Economic Research; Centre for Economic Policy Research - UK; University of California System; University of California San Diego
• 刊物名称: REVIEW OF ECONOMIC STUDIES
• ISSN/ISSBN: 0034-6527
• DOI: 10.1093/restud/rdac072
• 发表日期: 2023
• 页码: 2395-2438
• 关键词: monetary-policy; RISK; deviations; premium; demand; dollar; TRADE; MODEL

摘要

We find strong empirical evidence that the liquidity yield on government bonds in combination with standard economic fundamentals can well account for nominal exchange rate movements. We find impressive evidence that changes in the liquidity yield are significant in explaining exchange rate changes for all the G10 countries, and we stress that the US dollar is not special in this relationship. 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.