Unanticipated money and the demand for foreign assets: a rational expectations approach

F.Y. Kumah

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This paper is an attempt at empirically investigating one of the building blocks of the foreign exchange market - the demand for foreign financial assets - under two alternative monetary policy rules (the fixed rate of growth of money rule and the feedback monetary policy rule) using time series data for Germany over the period 1974:1 - 1992:4. The approach adopted here offers us the opportunity of investigating the impact of monetary policy shocks on the demand for foreign assets. It turns out that the data-set picks the feedback monetary policy rule as characterising the data generation process better. Based on this feedback policy rule roughly 23% of monetary policy shocks have permanent effects (and the remaining percentage of these shocks exhibit transitory effects) on the demand for foreign assets. Our empirical results indicate, among others, that unanticipated monetary policy shocks and increases in the interest rate differential drive German investors abroad whereas domestic interest rate increases and currency depreciations demonstrate the "safe-haven" effect (that is to say domestic investors prefer having their investments in assets denominated in Deutsche Marks).
Original languageEnglish
PublisherCentER, Center for Economic Research
Publication statusPublished - 1995

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NameCentER Discussion Paper


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