Universität zu Köln

Linnemann, Ludger and Schabert, Andreas (2015). Liquidity premia and interest rate parity. J. Int. Econ., 97 (1). S. 178 - 193. AMSTERDAM: ELSEVIER SCIENCE BV. ISSN 1873-0353

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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 UNSPECIFIED UNSPECIFIED Schabert, Andreas UNSPECIFIED UNSPECIFIED UNSPECIFIED
URN:	urn:nbn:de:hbz:38-393954
DOI:	10.1016/j.jinteco.2015.03.006
Journal or Publication Title:	J. Int. Econ.
Volume:	97
Number:	1
Page Range:	S. 178 - 193
Date:	2015
Publisher:	ELSEVIER SCIENCE BV
Place of Publication:	AMSTERDAM
ISSN:	1873-0353
Language:	English
Faculty:	Unspecified
Divisions:	Unspecified
Subjects:	no entry
Uncontrolled Keywords:	Keywords Language MONETARY-POLICY; SHOCKS Multiple languages Economics Multiple languages
URI:	http://kups.ub.uni-koeln.de/id/eprint/39395