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Liquidity and Exchange Rates: An Empirical Investigation

Charles Engel and Steve Pak Yeung Wu

University of California at San Diego, Economics Working Paper Series from Department of Economics, UC San Diego

Abstract: Abstract: 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.

Keywords: Economics; Applied Economics; Econometrics; Applied economics; Economic theory (search for similar items in EconPapers)
Date: 2023-09-05
New Economics Papers: this item is included in nep-dge, nep-ifn, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Liquidity and Exchange Rates: An Empirical Investigation (2023) Downloads
Working Paper: Liquidity and Exchange Rates - An Empirical Investigation (2018) Downloads
Working Paper: Liquidity and Exchange Rates: An Empirical Investigation (2018) Downloads
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