Working Paper: NBER ID: w27342
Authors: Ralph S. J. Koijen; Motohiro Yogo
Abstract: We develop an asset demand system to study exchange rates, short-term rates, long-term yields, and equity prices across 37 countries. Using international portfolio holdings data, we estimate the asset demand system by instrumental variables. We develop a unified framework to decompose the variation in exchange rates and asset prices into portfolio flows and shifts in asset demand, to interpret economic events such as the European sovereign debt crisis, and to estimate the convenience yield on US assets. The convenience yield is 1.45 percent on the US dollar, 2.81 percent on long-term debt, and 0.50 percent on equity.
Keywords: Exchange Rates; Asset Prices; Global Demand System
JEL Codes: E52; F31; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| macroeconomic variables (E19) | exchange rates (F31) |
| policy variables (E64) | exchange rates (F31) |
| short-term rates (E43) | exchange rates (F31) |
| long-term debt quantities (H63) | exchange rates (F31) |
| foreign exchange reserves (F31) | exchange rates (F31) |
| latent demand (R22) | exchange rates (F31) |
| asset prices (G19) | demand (R22) |
| short-term rates (E43) | long-term yields (E43) |
| long-term debt quantities (H63) | long-term yields (E43) |
| expected annual appreciation of the US dollar (F31) | long-term yield (E43) |
| expected long-term yield (G17) | long-term yield (E43) |