McKenzie, Colin R
Description
Three important issues for exchange rate management policy in Japan,
sterilized intervention, currency substitution and financial liberalization, are discussed
in this thesis. The analytic starting point for the analysis of these issues is the open
economy portfolio balance model. The empirical importance of these three issues
depends on three critical assumptions relating to: the degree of substitution between
bonds denominated in different currencies (sterilized intervention); the degree...[Show more] of
substitution between mODles denominated In different currenCIes ( currency
su bstitu tion); and the stability of asset demand functions (financial liberalization).
Three methods are used to investigate whether bonds denominated in dollars
and yen are perfect substitutes. One method is based on a vector autoregression; the
second is based on a demand function for yen-denominated bonds taken from a
portfolio model; and the third is based on a 'market efficiency' model. For bonds
of three-month maturity, the evidence is broadly consistent with the two types of
bonds being imperfect substitutes. For bonds of one-month maturity, the evidence is
rather ambiguous. Strong support for the portfolio model that suggests sterilized
intervention will be effective is not found. Account was taken of the possibility that
some of the major Japanese financial liberalizations influenced the degree of
substitutability between bonds.
Currency substitution is concerned with the degree to which mODles
denominated In different currenCIes are substitutes for one another and are
substitutes for bonds In different currenCIes. Evidence on this will assist In
determining the importance of private sector switching between monies denominated
in different currencies and switching between money denominated in one currency
and bonds denominated in another. The appearance (or non-appearance) of foreign
interest rates and the expected rate of change of the exchange rate in the domestic
money demand function are two Issues that are of importance for currency
substitution. Estimates from a number of money demand functions for yendenominated
money suggest that currency substitution is not important for the yen
even following a regulatory change in 1980 that might have been expected to
increase the possibilities for currency substitution.Over the past ten years, a great deal of financial liberalization has occu rred In
Japan. Much of the international pressure for Japanese liberalization has been
motivated by a desire to achieve an appreciation of the yen. Some of the general
arguments linking liberalization and the value of the yen are evaluated and it is
concluded that, in the short-run, an appreciation of the yen is not a necessary
consequence of financial liberalization. Some of the arguments suggested that a
depreciation of the yen was a likely consequence. A number of recent regulatory
changes in Japan are examined to determine what characteristics a regulatory
change should incorporate if it is to impact on asset demands and the exchange
rate.
Items in Open Research are protected by copyright, with all rights reserved, unless otherwise indicated.