Exchange rates

Neil Gandal, JT Hamrick, Tyler Moore, Tali Oberman, 22 June 2017

The cryptocurrency Bitcoin has attracted widespread interest, in large part due to wild swings in its valuation. This column considers an earlier rise in the Bitcoin price to investigate what is driving the currency’s price spikes. The 2013 rise was caused by fraudulent trades taking place at the largest Bitcoin currency exchange at the time. This finding has implications for policymakers as they weigh what, if anything, to do about regulating cryptocurrencies in light of the record high Bitcoin valuation that many fear is a bubble.

Takeshi Kimura, Teppei Nagano, 30 May 2017

While non-US entities pay dollar funding premiums in the FX swap market, the US earns profits on FX-hedged investments in non-US sovereign securities. This column argues that this new form of the ‘exorbitant privilege’ presents a modern version of the ‘Triffin dilemma’. If the distributional effect of US privilege becomes large enough to induce non-US entities to take excessive risk, the stability of the global financial system will come under threat. 

Woo Jin Choi, Alan Taylor, 22 May 2017

Widening global imbalances, driven by reserve accumulation, can help us investigate how real exchange rates are determined. Standard theory would predict real exchange rate appreciation when there is an increase in net foreign assets. This column uses recent data from 75 countries to argue that, in practice, there is the opposite correlation in the particular case of reserve accumulation, notably in countries with higher capital controls and in developing countries.

Kris Mitchener, Gonçalo Pina, 04 May 2017

Fixed exchange-rate regimes reduce uncertainty, which may increase trade and encourage investment and capital flows. This column identifies and tests one reason why markets expect countries to abandon pegs and devalue their currencies – shocks to the value of their output. During the classical gold standard era, commodity price fluctuations determined expected devaluation by investors, as measured by currency risk. These results highlight how trade shocks in an integrated world may undermine fixed exchange rate regimes under limited fiscal adjustments.

Yin-Wong Cheung, Menzie Chinn, Antonio Garcia Pascual, Yi Zhang, 27 April 2017

Previous assessments of nominal exchange rate determination have focused on a narrow set of models. Using data for six currencies, this column examines the performance of an expanded set of models at various forecast horizons. No model consistently outperforms a random walk benchmark, although the purchasing power parity model does fairly well. Overall, combinations of model, specification, and currency that work in one period will not necessarily work well in another.

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