Friday, April 03, 2009

More on the Dram

This is a follow up to my March 4 post. The share of Dram denominated bank deposits dropped from 63 percent of total deposits at the end of November to 39 percent in February. Other than the fear of the uncertainties of the global financial crises, and the related flight to quality, it is not clear what else explains this trend. What is certain however is that so much Drams cannot be dumped without depressing its value. The CBA could not defend the Dram at 305 units to the USD, and perhaps should not have intervened. In early March it gave up and stopped its intervention and the value of the Dram dropped to about 365 units per USD.

Two questions: What would have happened had the CBA not intervened? The chart below may tell one story, but that is too simplistic. Second, why do econometric models of exchange rates ignore the composition of deposits and its information content?

Jan 1995-Feb 2009: Drams per USD (red) and share of Dram deposits (blue, right axis); Rsq = 0.81
Source: CBA

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