Forward exchange, short term capital flows and monetary policy

Coulbois, Paul; Prissert, Pierre

doi:10.1007/bf01680112

Cited by 12 publications

(3 citation statements)

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“…CIP therefore can only state that the forward rate over spot rate will be equal to the foreign long-term over the domestic long-term interest rate 𝑖 -of low-credit-risk, near-money assets with the same maturity as the forward contract. This is consistent with the empirical data in all times, except during the height of the 2009 financial crisis (Baba & Packer, 2009;Coulbois & Prissert, 1974;Frenkel & Levich, 1975;Jongen et al, 2008;Taylor, 1987).…”

Section: Matched Book Dealer Speculative Dealersupporting

confidence: 91%

“…The orthodox interpretation of CIP is again based on any simple no-arbitrage condition: Any deviation from it would give rise to an arbitrage opportunity (known as "carry trade"): For example, by borrowing spot in a currency with a low interest rate and using the proceeds to buy and then lend forward in the high-interest currency, one would reap a risk-free profit. This arbitrage would eventually bring forward rates back into the equilibrium rate (Coulbois & Prissert, 1974).…”

Section: Liquidity Premia Interest Rates and Forward Exchange Ratesmentioning

confidence: 99%

“…The Horizontalist or "Cambist" view (Lavoie, 2000;2012;Coulbois & Prissert, 1974) posits that the forward rate is simply a mark-up that banks add to the current spot rate given the differential between the domestic and foreign interest rates when they hedge their spot exchange operations in the forward market. 18 CIP (the equality in equation 5) is "determined mechanically" by the cambio operation of banks, "not by demand and supply" for a currency, as it is assumed both in the neoclassical and, as we shall see, in the structuralist interpretation (Lavoie, 2000, p.147).…”

Section: Liquidity Premia Interest Rates and Forward Exchange Ratesmentioning

confidence: 99%

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Are liquidity premia the missing pieces in the PPP puzzle?

Olk

2023

Preprint

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The purchasing power of a given currency varies across countries. Countries’ price levels, measured in USD, diverge significantly. The theoretical literature in Minsky’s tradition explains divergences in the other prices of money (the exchange rate, the interest rate and par) with reference to liquidity premia and monetary hierarchy. This argument has not been connected to the price level, which can be defined as the relationship between exchange rates and purchasing power parity rates. This essay presents a hypothesis for that missing connection: Different currencies with different degrees of liquidity are used as a store of value and international means of payment to different degrees. The resulting divergence between the demand for money in the foreign exchange market and the demand for money in the market for commodities moves the market exchange rate away from a level that would equalize purchasing power rates across countries. Based on a review of the Post-Keynesian literature on the links between interest rates and exchange rates, I develop an empirical measure for currencies’ liquidity premia in the foreign exchange market. I use it to empirically test my hypothesis, which I formalize as a simple regression model. My results suggest that the hypothesized effect is small, but significant. This finding points to a causal link between currency hierarchy and ecologically unequal exchange.

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