Currency preferences and the Australian dollar

We investigate currency substitution and currency complementarity in the case of the Australian dollar. Data spanning 1984-2003 contain evidence of the Australian dollar's substitution for the Deutschmark and complementarity with the yen and the US dollar, consistent with the theory that international variables will in general affect the demand for domestic money. Atemporally nonseparable preferences also give rise to the possibility of third-currency effects. Our regressions find some evidence of these. For example, a rise in the US federal funds rate has been associated with rises in the value of the Australian dollar against the mark and yen, controlling for changes in other interest rates and in money supplies and real outputs.