Universität zu Köln

Linnemann, Ludger ORCID: 0000-0001-8210-0002 and Schabert, Andreas ORCID: 0000-0002-4924-9937 (2015). Liquidity premia and interest rate parity. Journal of International Economics, 97 (1). 178 - 193. AMSTERDAM: ELSEVIER SCIENCE BV. ISSN 1873-0353 ; 0022-1996

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Abstract

Due to the US dollar's dominant role for international trade and finance, risk-free assets denominated in US currency not only offer a pecuniary return, but also provide transaction services, both nationally and internationally. Accordingly, the responses of bilateral US dollar exchange rates to interest rate shocks should differ substantially with respect to the (US or foreign) origin of the shock We demonstrate this empirically and apply a model of liquidity premia on US treasuries originating from monetary policy implementation. The liquidity premium leads to a modification of uncovered interest rate parity (UIP), which enables the model to explain an appreciation of the dollar subsequent to an increase in US interest rates if foreign interest rates follow the US monetary policy rate. (C) 2015 Elsevier B.V. All rights reserved.

Item Type:	Journal Article
Creators:	Creators Email ORCID ORCID Put Code Linnemann, Ludger UNSPECIFIED orcid.org/0000-0001-8210-0002 UNSPECIFIED Schabert, Andreas UNSPECIFIED orcid.org/0000-0002-4924-9937 UNSPECIFIED
URN:	urn:nbn:de:hbz:38-393954
DOI:	10.1016/j.jinteco.2015.03.006
Journal or Publication Title:	Journal of International Economics
Volume:	97
Number:	1
Page Range:	178 - 193
Date:	2015
Publisher:	ELSEVIER SCIENCE BV
Place of Publication:	AMSTERDAM
ISSN:	1873-0353 ; 0022-1996
Language:	English
Faculty:	Central Institutions / Interdisciplinary Research Centers
Divisions:	Weitere Institute, Arbeits- und Forschungsgruppen > Center for Macroeconomic Research (CMR)
Subjects:	Economics
Uncontrolled Keywords:	Keywords Language MONETARY-POLICY; SHOCKS Multiple languages Economics Multiple languages
Refereed:	Yes
URI:	http://kups.ub.uni-koeln.de/id/eprint/39395