Exchange Rates

Suman Basu · Emine Boz · Gita Gopinath · Francisco Roch · Filiz Unsal

Prepared as background for the IMF's Integrated Policy Framework, this paper builds a three-period small open economy in which monetary policy, capital inflow controls, sterilized foreign exchange …

Tobias Adrian · Christopher Erceg · Marcin Kolasa · Jesper Lindé · Pawel Zabczyk

A microfounded two-country New Keynesian model, calibrated separately to a representative emerging market and a representative advanced economy, in which limited FX-market risk-bearing capacity and an …

Tobias Adrian · Christopher Erceg · Jesper Lindé · Pawel Zabczyk · Jianping Zhou

An empirically-oriented New Keynesian small open economy model, of the kind central banks use, built to quantify when foreign exchange intervention and capital flow management tools improve monetary …

Robert A. Mundell

Mundell poses a deceptively simple question: if a currency area is defined as "a domain within which exchange rates are fixed," what is the right size for one? Starting from a stylized two-entity …

Charles Engel

This 1999 Journal of Political Economy paper (NBER Working Paper 5394, 1995) by Charles Engel asks how much of the historical variation in the U.S. real exchange rate against other high-income …

Elhanan Helpman

This 1981 Journal of Political Economy paper by Elhanan Helpman compares three exchange-rate regimes -- a float, a one-sided peg, and a cooperative peg -- in a two-country, perfect-foresight model …

Gita Gopinath · Jeremy C Stein

A currency's role as the unit of account in which trade is invoiced and its role as a safe store of value reinforce each other, because households who buy dollar-priced imports want dollar-denominated …

Alfred Wong · Jiayue Zhang

Cross-currency basis swap spreads are widely read as a post-crisis anomaly in which covered interest parity has broken down; this paper argues the opposite -- that a swap dealer who priced a …

Kenneth Rogoff

This 1985 Journal of International Economics paper by Kenneth Rogoff shows that increased cooperation between central banks does not automatically raise welfare, because cooperation can exacerbate …

V. V Chari · Patrick J. Kehoe · Ellen R. McGrattan

Chari, Kehoe, and McGrattan build a calibrated two-country sticky-price model with price-discriminating, staggered-price monopolists and find it can generate exchange-rate volatility and persistence …

Maurice Obstfeld

This 1986 Journal of International Economics paper by Maurice Obstfeld re-examines the classic monetary-approach claim that devaluation under capital controls has no long-run real effects, by adding …

Valentina Bruno · Hyun Song Shin

Bank leverage is the linchpin of a risk-taking channel through which monetary policy travels across borders: in a pre-crisis quarterly VAR a tighter US policy rate raises the VIX, lowers broker-dealer …

R. A. Mundell

This 1963 Canadian Journal of Economics and Political Science paper by Robert Mundell asks what happens to monetary and fiscal policy's power over domestic income and employment once capital is …

Wenxin Du · Jesse Schreger

A Handbook chapter reviewing the breakdown of covered interest rate parity during the Global Financial Crisis and its persistence through the following decade -- how the cross-currency basis is …

Hanno Lustig · Nikolai Roussanov · Adrien Verdelhan

Sorting currencies into six portfolios by their forward discounts, this paper shows that a single return-based factor -- the return on the highest minus the return on the lowest interest rate currency …

David K. Backus · Gregor W. Smith

Nontraded goods had been invoked to explain several international puzzles at once -- persistent deviations from purchasing power parity, low cross-country consumption correlations, and real interest …

A. Alesina · R. J. Barro

This 2002 Quarterly Journal of Economics paper by Alberto Alesina and Robert Barro builds a formal model of which countries should give up their own currency and adopt another country's, combining a …

Wenxin Du · Alexander Tepper · Adrien Verdelhan

Covered interest rate parity, the no-arbitrage cornerstone of currency forward pricing, is shown to be systematically and persistently violated among G10 currencies after the 2008 crisis, in ways that …

Philippe Bacchetta · Eric van Wincoop

This 2000 American Economic Review paper by Philippe Bacchetta and Eric van Wincoop builds a one-period, two-country monetary general-equilibrium model to ask whether exchange-rate stability really …

Hanno Lustig · Adrien Verdelhan

Even the most extreme departure from complete international asset markets -- one in which investors can hold nothing abroad but the foreign risk-free bond -- fails to match the smoothness of exchange …

Michael McLeay · Silvana Tenreyro

An emerging view in international macroeconomics contends that dollar invoicing of exports renders monetary policy ineffective for non-U.S. countries: because export prices are allegedly sticky in …

J. Marcus Fleming

This 1962 IMF Staff Papers article by J. Marcus Fleming compares how effective monetary policy and budgetary (fiscal) policy are at stimulating domestic income and output under fixed versus floating …

Gita Gopinath · Emine Boz · Camila Casas · Federico J. Díez · Pierre-Olivier Gourinchas · Mikkel Plagborg-Møller

Because most trade is invoiced in a few dominant currencies rather than in the producer's or the destination's currency, it is the dollar exchange rate and not the bilateral one that drives import …

Richard A. Meese · Kenneth Rogoff

Across the dollar/mark, dollar/pound, dollar/yen and trade-weighted dollar rates over November 1976 to June 1981, no structural exchange rate model, univariate time series model, vector autoregression …

Maurice Obstfeld · Kenneth Rogoff

This 1995 Journal of Political Economy paper by Maurice Obstfeld and Kenneth Rogoff builds the foundational "Redux" two-country dynamic general-equilibrium model that bridges the intertemporal …

Elhanan Helpman · Assaf Razin

This 1987 American Economic Review paper by Elhanan Helpman and Assaf Razin shows that managing an exchange rate is never a purely monetary act: it is feasible only together with a monetary-fiscal …

Barbara Rossi

Asked whether anything forecasts exchange rates, this survey's answer is "it depends" -- on the predictor, the horizon, the sample, the model and the evaluation test. Predictability shows up most …

Kenneth A. Froot · Jeremy C. Stein

This 1991 Quarterly Journal of Economics paper by Kenneth Froot and Jeremy Stein explains the empirical correlation between dollar depreciation and foreign direct investment (FDI) inflows into the …

Rudiger Dornbusch

Motivated by the large, persistent real appreciation of the dollar between 1980 and 1985, this paper takes the nominal exchange rate movement as given (it does not explain it) and asks, in a …

Stefan Avdjiev · Cathérine Koch · Hyun Song Shin

Across four econometric approaches and up to 114 borrowing countries, a stronger international funding currency goes with less cross-border bank lending denominated in that currency: a one percentage …

Rudiger Dornbusch

This 1976 Journal of Political Economy paper by Rudiger Dornbusch builds a small open-economy model in which capital is perfectly mobile and asset markets clear instantly, but the price of domestic …

Philip R Lane · Jay C Shambaugh

This paper builds a database of international currency exposures for a large panel of countries over 1990-2004 and uses it to construct financially-weighted exchange rate indices, showing that …

Philippe Bacchetta · Kenza Benhima · Brendan Berthold

Most recent work on optimal foreign-exchange intervention prices the opportunity cost of reserves off either deviations from uncovered interest parity or deviations from covered interest parity, and …

Maurice Obstfeld · Alan M. Taylor

Global capital mobility traces a U over the past century and a half, and the authors argue the shape is explained by the open-economy policy trilemma rather than by technology: capital moved freely …

Pinelopi K. Goldberg · Michael M. Knetter

This 1997 Journal of Economic Literature survey by Pinelopi Goldberg and Michael Knetter synthesizes nearly 700 articles on the relationship between exchange rates and goods prices, organizing the …

Julian di Giovanni · Şebnem Kalemli-Özcan · Mehmet Fatih Ulu · Yusuf Soner Baskaya

Using the universe of Turkish corporate credit transactions matched to bank balance sheets over 2003-13, this paper shows that an easing of global financial conditions lowers domestic borrowing costs …

Vittorio Grilli · Nouriel Roubini

This 1992 Journal of International Economics paper by Vittorio Grilli and Nouriel Roubini builds a two-country extension of Lucas's (1988) cash-in-advance model of asset-market liquidity, in which …

Wenxin Du · Jesse Schreger

Emerging-market governments that borrow in their own currency still pay a measurable default premium: stripping out currency risk with cross-currency swaps leaves a "local currency credit spread" …

Toni Ahnert · Kristin Forbes · Christian Friedrich · Dennis Reinhardt

Macroprudential rules on banks' foreign currency exposure do what they are meant to do -- cross-border FX borrowing by banks falls by roughly a third, and bank stock returns become markedly less …

Michael B. Devereux · Charles Engel

This 2003 Review of Economic Studies paper by Michael Devereux and Charles Engel builds a welfare-based, two-country stochastic sticky-price model -- extending Obstfeld and Rogoff (1995, 1998) -- to …

Fernando Alvarez · Andrew Atkeson

This 1997 Journal of Monetary Economics paper by Fernando Alvarez and Andrew Atkeson asks whether the segmented-markets model of money pioneered by Grossman and Weiss (1983) and Rotemberg (1984, 1985) …

Fernando Alvarez · Andrew Atkeson · Patrick J. Kehoe

Alvarez, Atkeson, and Kehoe build a cash-in-advance model in which households face a fixed real cost to transfer funds between a goods market and an asset market, so that in any period only a fraction …

Maurice Obstfeld · Kenneth Rogoff

This 2000 Journal of International Economics paper by Maurice Obstfeld and Kenneth Rogoff extends the "Redux" sticky-price approach to a genuinely stochastic setting with an exact closed-form solution …

A. K. Rose

This 2000 Economic Policy paper by Andrew Rose asks a simple question -- does sharing a currency boost trade, and by how much -- using a large cross-country panel rather than the handful of …

Maurice Obstfeld

This 1986 American Economic Review paper by Maurice Obstfeld shows that speculative attacks on a fixed exchange rate do not have to be the inevitable, fully-anticipated consequence of unsustainable …

Torsten Persson

This 1984 Journal of Monetary Economics paper by Torsten Persson (circulated as IIES Seminar Paper No. 237, February 1983) asks whether the "monetary approach to the balance of payments" (MABOP) …

Oleg Itskhoki · Dmitry Mukhin

Itskhoki and Mukhin develop a tractable open-economy model with financial market segmentation — in which only the government sector (including state banks and exporting firms) can intermediate …

Richard Clarida · Jordi Gali

This 1994 Carnegie-Rochester Conference Series paper by Richard Clarida and Jordi Galí asks how much of the variance of real exchange rates since the collapse of Bretton Woods is attributable to …

Paul R. Krugman

Krugman presents a highly simplified continuous-time model of how an exchange rate behaves inside a credible target zone -- a band the authorities are committed to defend at its edges, but need not …

Francesco Giavazzi · Marco Pagano

This 1988 European Economic Review paper by Francesco Giavazzi and Marco Pagano asks why a high-inflation country would voluntarily submit to the EMS's fixed-but-adjustable exchange-rate discipline, …

George S. Tavlas

This paper sets Milton Friedman's 1953 essay "The Case for Flexible Exchange Rates" side by side with Harry Johnson's near-identically titled 1969 essay, argument by argument, and concludes that …

Benjamin Hébert · Jesse Schreger

US court rulings in Republic of Argentina v. NML Capital moved the market-implied probability that Argentina would default on its restructured bonds without carrying any news about the Argentine …

Stefan Avdjiev · Wenxin Du · Cathérine Koch · Hyun Song Shin

The strength of the US dollar, the size of covered interest parity deviations and the growth of dollar-denominated cross-border bank lending move together in what the authors call a triangular …

Maurizio Michael Habib · Fabrizio Venditti

Decomposing a global risk factor built from stock returns in 63 economies into structural shocks, this paper finds that exogenous shifts in the financial sector's risk-bearing capacity matter more …

Philip R. Lane

An interim survey of the dynamic general equilibrium open-economy literature that grew out of Obstfeld and Rogoff's 1995 Redux model, organised around the question of which of its assumptions its …

Kenneth Rogoff

This 1996 Journal of Economic Literature survey by Kenneth Rogoff states the purchasing power parity (PPP) puzzle as a reconciliation problem: the empirical literature finds that real exchange rates …

Maurice Obstfeld · Kenneth Rogoff

Six of international macroeconomics' most stubborn puzzles -- home bias in trade, Feldstein-Horioka, home bias in equity portfolios, low consumption correlations, the slow mean reversion of real …

Stephen Morris · Hyun Song Shin

This 1998 American Economic Review paper by Stephen Morris and Hyun Song Shin resolves the multiple-equilibrium indeterminacy of standard self-fulfilling currency-attack models by replacing common …