Book contents
- Frontmatter
- Contents
- List of figures
- List of tables
- Preface
- Acknowledgements
- Notes on contributors
- Introduction
- PART I HOUSEHOLDS AND FIRMS
- PART II FINANCIAL MARKETS
- 4 Financial liberalisation and exchange rate volatility
- 5 Capital mobility, vehicle currencies and exchange rate asymmetries in the EMS
- Discussion
- 6 Shifting gears: an economic evaluation of the reform of the Paris Bourse
- 7 Front-running and stock market liquidity
- 8 Auction markets, dealership markets and execution risk
- Discussion
- 9 The impact of a new futures contract on risk premia in the term structure: an APT analysis for French government bonds
- PART III BANKS
- Index
5 - Capital mobility, vehicle currencies and exchange rate asymmetries in the EMS
Published online by Cambridge University Press: 20 March 2010
- Frontmatter
- Contents
- List of figures
- List of tables
- Preface
- Acknowledgements
- Notes on contributors
- Introduction
- PART I HOUSEHOLDS AND FIRMS
- PART II FINANCIAL MARKETS
- 4 Financial liberalisation and exchange rate volatility
- 5 Capital mobility, vehicle currencies and exchange rate asymmetries in the EMS
- Discussion
- 6 Shifting gears: an economic evaluation of the reform of the Paris Bourse
- 7 Front-running and stock market liquidity
- 8 Auction markets, dealership markets and execution risk
- Discussion
- 9 The impact of a new futures contract on risk premia in the term structure: an APT analysis for French government bonds
- PART III BANKS
- Index
Summary
Introduction
Given the EC decision to liberalise capital movements by 1990, it is important to analyse the effects of this removal of capital controls on the inter-EMS exchange rates. This issue is important because, according to a popular point of view, disturbances external to the EMS (such as movements of the dollar driven by US monetary and fiscal policies) have led in the past to inter-EMS exchange rate tensions. This point of view is supported by the empirical observation that, in periods of strength (weakness) of the dollar, the Deutsche mark appears to be weak (strong) relative to the other EMS currencies.
One possible explanation of this empirical fact is based on the assumption that assets denominated in different currencies are imperfect substitutes in the portfolios of international investors. In particular, it is argued that the degree of asset substitutability between dollar and Deutsche mark-denominated assets is greater than the one between the dollar and other European currencies-denominated assets (such as the French franc or the Italian lira). In the presence of this type of imperfect asset substitutability, portfolio shifts (driven by changes in expectations and/or changes in fundamentals) will have asymmetric effects on the exchange rates between the Deutsche mark and the EMS currencies. For example, shocks that lead to an increase (decrease) in the demand for dollar assets will reduce (increase) the demand for the Deutsche mark more than the demand for French francs or Italian lire.
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- Financial Markets Liberalisation and the Role of Banks , pp. 109 - 143Publisher: Cambridge University PressPrint publication year: 1993
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