Reproduction permitted only if source is stated.ISBN 978-3-95729-086-1 (Printversion) Non-technical summary Research QuestionExperience has shown that exchange rates can be fairly volatile in times of heightened tension in international financial markets. This often sends the currencies of countries with relatively high interest rates on a steep and abrupt downward trajectory. The opposite can be observed for low-interest currencies. Currencies which have a tendency to appreciate in times of crisis are often referred to as "safe haven" currencies in the media and the relevant literature. However, the term "safe haven" currency is not always used consistently, and different currencies are regarded as safe haven currencies in different settings. Moreover, in most cases no distinction is made as to whether exchange rate reactions are due to "safe haven" flows-movements of capital by investors who believe that a particular currency area is a relatively safe place to invest their capital in times of crisis-or to the unwinding of currency carry trades, ie speculative transactions in which investors seek to take advantage of interest rate differentials in an effort to generate superior returns. ContributionThis article suggests an empirical approach, which allows us to identify safe haven currencies and distinguish them from other currency classifications. In the underlying threshold regression model an explicit distinction is made between times of higher and lower tensions on the financial markets and an analysis is made of how far the exchange rate reactions in both regimes differ. A currency is called a "safe haven" currency if its returns are negatively related to the returns of a reference portfolio (in our case a global stock market index) in times of heightened tension in international financial markets when other exchange rate determinants are controlled for. ResultsBased on the empirical findings, the Swiss franc and the US dollar can be described as safe haven currencies. The appreciation of the yen in times of crisis, meanwhile, appears to be mainly attributable to the unwinding of carry trades. As for the euro, the results produced by the model do not point to any crisis-specific reaction. In this paper, we analyze which currencies can be regarded as safe haven currencies. Our empirical approach allows us to distinguish between a low-and high stress regime, and to control for the impact of carry trade reversals and other fundamental determinants. We therefore address the question of whether a supposed safe haven currency only appreciates in times of crises because carry trades are unwound, in which the corresponding currency has served as funding currency, or whether it possesses "true" safe haven qualities; i.e. it provides a hedge against global stock market losses in stressful times even after controlling for the impact of carry trade reversals. The latter issue has largely been brushed aside in the extant literature but has important policy implications for the justification of central bank FX interven...
In this paper, we analyze the money demand functions of the four largest EMU countries and of the four‐country (EMU‐4) aggregate. We identify reasonable and stable money demand relationships for Germany, France and Spain as well as the EMU‐4 aggregate. For the case of Italy, results are less clear. From the estimated money demand functions, we derive both EMU‐4 and country‐specific measures of money overhang. We find that the EMU‐4 overhang measure strongly correlates with the country‐specific measures, particularly since the start of EMU, and is useful to predict country‐specific inflation. However, it generally does not encompass country‐specific money overhang measures as predictors of inflation. Hence, aggregate money overhang is an important, but by far not an exhaustive, indicator for the disaggregate level.
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