Currency Competition and Foreign Exchange

Currency Competition and Foreign Exchange Markets by Philipp Hartmann of the European Central Bank is a major theoretical and empirical study of international currencies, which focuses on the role which the Euro will play in the international monetary and financial system along with the US dollar and the Japanese yen. In contrast to much of the existing literature which approaches the subject from a macroeconomic perspective, Philipp Hartmann develops a theoretical model which uses game theory, time series and panel econometrics, and links financial markets analysis with transaction cost economics. The results of Currency Competition and Foreign Exchange Markets are presented with reference to political, historical and institutional considerations, and provide accessible answers to policy-makers, business people and scholars worldwide. The sections on Spread Estimation and Multiple Vehicles with Inter-Dealer Price and Entry Competition will be of particular use for finance professionals.

List of figures

vii

(1)

List of tables

viii

(3)

Preface and acknowledgements

xi

1 Introduction

1

(10)

1.1 Importance of currency internationalization and European Monetary Union

2

(3)

1.2 Pivotal role of forex markets

5

(2)

1.3 Overview of the book

7

(4)

2 National and international money: a survey

11

(29)

2.1 Functions of international money

12

(7)

2.2 Theories of international money

19

(10)

2.3 A brief history of international money

29

(11)

3 A theory of vehicle currencies

40

(36)

3.1 Introduction

40

(2)

3.2 Transaction costs in the forex market

42

(6)

3.3 Structures of currency exchange

48

(16)

3.4 Conclusions

64

(2)

Appendix: multiple vehicles with inter-dealer price and entry competition

66

(10)

4 Currency competition between the euro, the dollar and the yen

76

(56)

4.1 Introduction

76

(4)

4.2 The emergence of the Deutsche mark as a forex vehicle currency and the `simple arithmetics' of EMU

80

(9)

4.3 EMU and forex markets

89

(8)

4.4 EMU and foreign trade invoicing

97

(17)

4.5 EMU and official reserve holdings

114

(3)

4.6 EMU, international investment and the evolution of-European financial markets

117

(12)

4.7 Conclusions

129

(3)

5 Trading volumes and transaction costs: from the short run to the long run

132

(32)

5.1 Introduction

132

(2)

5.2 Spread theory refined

134

(3)

5.3 A survey of spread estimations

137

(8)

5.4 Spreads and volumes in the short run: a time-series approach

145

(7)

5.5 Spreads and volumes in the long run: a panel-data approach

152

(10)

5.6 Conclusions

162

(2)

6 General conclusions

164

(6)

6.1 International monetary and financial policies

165

(2)

6.2 Theory of international money

167

(1)

6.3 Forex market micro-structure analysis

168

(2)

Bibliography

170

(19)

Index

189

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Currency Competition and Foreign Exchange Markets: The Dollar, the Yen and the Euro

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Table of Contents

Supplemental Materials