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News shocks, monetary policy, and foreign currency positions
Küçük, Hande; De Paoli, Bianca (2015-12-01)
Over the past two decades, before the global financial crisis, there was a rapid rise in the size of gross external portfolio positions as well as a decrease in the net negative foreign currency exposure in external balance sheets. In this paper, we present a theoretical model in which these portfolio facts can be explained by changes in monetary policy rules and the composition of shocks that underlie economic fluctuations. We find that policies with a strong emphasis on price stability would imply shorter positions in foreign currency when the dominant sources of fluctuations are supply ...
Staff Reports , Paper 750

Working Paper
Risk sharing in a world economy with uncertainty shocks
Kollmann, Robert (2015-11-01)
This paper analyzes the effects of output volatility shocks and of risk appetite shocks on the dynamics of consumption, trade flows and the real exchange rate, in a two-country world with recursive preferences and complete financial markets. When the risk aversion coefficient exceeds the inverse of the intertemporal substitution elasticity, then an exogenous rise in a country?s output volatility triggers a wealth transfer to that country, in equilibrium; this raises its consumption, lowers its trade balance and appreciates its real exchange rate. The effects of risk appetite shocks resemble ...
Globalization Institute Working Papers , Paper 258

Report
Gender differences in the labor market effects of the dollar
Goldberg, Linda S.; Tracy, Joseph (2001-04-01)
Although the dollar has been shown to influence the expected wages of workers, the analysis to date has focused on the male workforce. We show that exchange rate fluctuations also have important implications for women's wages. The dominant wage effects for women?like those for men?arise at times of job transition. Changes in the value of the dollar can cause the wage gap between women who change jobs and women who stay on in their jobs to expand or contract sharply, with the most pronounced effects occurring among the least educated women and women in highly competitive manufacturing ...
Staff Reports , Paper 121

Working Paper
Exchange Rate Policies at the Zero Lower Bound
Amador, Manuel; Bianchi, Javier; Bocola, Luigi; Perri, Fabrizio (2017-03-16)
We study how a monetary authority pursues an exchange rate objective in an environment that features a zero lower bound (ZLB) constraint on nominal interest rates and limits to international arbitrage. If the nominal interest rate that is consistent with interest rate parity is positive, the central bank can achieve its exchange rate objective by choosing that interest rate, a well-known result in international ?nance. However, if the rate consistent with parity is negative, pursuing an exchange rate objective necessarily results in zero nominal interest rates, deviations from parity, capital ...
Working Papers , Paper 740

Working Paper
In Search of Dominant Drivers of the Real Exchange Rate
Miyamoto, Wataru; Nguyen, Thuy Lan; Oh, Hyunseung (2023-03-31)
We uncover the major drivers of macro aggregates and the real exchange rate at business cycle frequencies in Group of Seven countries. The estimated main drivers of key macro variables resemble each other and account for a modest fraction of the real exchange rate variances. Dominant drivers of the real exchange rate are orthogonal to main drivers of business cycles, generate a significant deviation of the uncovered interest parity condition, and lead to small movements in net exports. We use these facts to evaluate international business cycle models accounting for the dynamics of both macro ...
International Finance Discussion Papers , Paper 1373

Working Paper
Scrambling for Dollars: International Liquidity, Banks and Exchange Rates
Bianchi, Javier; Bigio, Saki; Engel, Charles (2021-11-05)
We develop a theory of exchange rate fluctuations arising from financial institutions’ demand for dollar liquid assets. Financial flows are unpredictable and may leave banks “scrambling for dollars.” Because of settlement frictions in interbank markets, a precautionary demand for dollar reserves emerges and gives rise to an endogenous convenience yield on the dollar. We show that an increase in the dollar funding risk leads to a rise in the convenience yield and an appreciation of the dollar, as banks scramble for dollars. We present empirical evidence on the relationship between ...
Working Papers , Paper 786

Working Paper
Real Effects of Foreign Exchange Risk Migration: Evidence from Matched Firm-Bank Microdata
Bräuning, Falk; Abbassi, Puriya (2020-07-01)
When firms trade forward contracts with banks to protect foreign currency cash flows against exchange rate movements, foreign exchange risk migrates to the banking sector. We show how this migrated risk may induce systemic repercussions with severe implications for the real economy. For identification, we exploit the Brexit referendum in June 2016 as a quasi-natural experiment in combination with detailed microdata on forward contracts and the credit register in Germany. Before the referendum, firms substantially increased their use of derivatives in response to the heightened uncertainty; ...
Working Papers , Paper 20-8

Working Paper
The Taylor rule and forecast intervals for exchange rates
Wang, Jian; http://fedora:8080/fcrepo/rest/objects/authors/ (2008)
This paper attacks the Meese-Rogoff (exchange rate disconnect) puzzle from a different perspective: out-of-sample interval forecasting. Most studies in the literature focus on point forecasts. In this paper, we apply Robust Semi-parametric (RS) interval forecasting to a group of Taylor rule models. Forecast intervals for twelve OECD exchange rates are generated and modified tests of Giacomini and White (2006) are conducted to compare the performance of Taylor rule models and the random walk. Our contribution is twofold.> ; First, we find that in general, Taylor rule models generate tighter ...
Globalization Institute Working Papers , Paper 22

Working Paper
How Can Asset Prices Value Exchange Rate Wedges?
Lewis, Karen K.; Liu, Edith X. (2022-11-07)
When available financial securities allow investors to optimally diversify risk across countries, standard theory implies that exchange rates should reflect this behavior. However, exchange rates observed in the data deviate from these predictions. In this paper, we develop a framework to value the welfare costs of these exchange rate wedges, as disciplined by asset returns. This framework applies to a general class of asset pricing and exchange rate models. We further decompose the value of these wedges into components, showing that the ability of goods markets to respond to financial ...
Finance and Economics Discussion Series , Paper 2022-075

Working Paper
Beyond the Doomsday Economics of “Proof-of-Work” in Cryptocurrencies
Auer, Raphael (2019-02-01)
This paper discusses the economics of how Bitcoin achieves data immutability, and thus payment finality, via costly computations, i.e., ?proof-of-work.? Further, it explores what the future might hold for cryptocurrencies modelled on this type of consensus algorithm. The conclusions are, first, that Bitcoin counterfeiting via ?double-spending? attacks is inherently profitable, making payment finality based on proof-of-work extremely expensive. Second, the transaction market cannot generate an adequate level of ?mining? income via fees as users free-ride on the fees of other transactions in a ...
Globalization Institute Working Papers , Paper 355

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