TRANSACTIONS COSTS AND VEHICLE CURRENCIES

Using a simple model of transactions costs in the interbank foreign exchange market and a model of vehicle currency use, the interaction between transactions costs and vehicle currency use is explored. The impact of volume on bid-ask spreads is estimated from cross-section time series data on seven currencies. Data on transactions costs and the currency denomination of trade and capital transactions are used to estimate changes in the attractiveness of using the US dollar as a vehicle between 1980 and 1987. The data suggest a modest reduction in the attractiveness and use of the dollar as a vehicle. © 1991.