Exchange rates

Torfinn Harding, Radek Stefanski, Gerhard Toews, 29 April 2020

Due to the collapse in the price of oil, oil-exporting economies are experiencing a huge loss of foreign revenues. This column argues that this may create a window of opportunity to transition away from resource dependence by expanding the tradable goods sector, hence diversifying the economies. Assuming symmetric economic responses for booms and busts and relying on estimates for unexpected giant resource discoveries which predict an appreciation of the real exchange rate and a contraction of the manufacturing sector, the current drop in the oil price may lead to a boom in manufacturing.

Mariarosaria Comunale, 20 April 2020

The concept of shock dependency of the pass-through emerged from an understanding that exchange rate movements, driven by different shocks, can have different effects on prices. This column attempts to shed a light on shock-dependent exchange rate pass-through for the euro area and its member states by drawing comparisons and looking at the robust results across the available structural empirical frameworks and theoretical models. It finds that different domestic and global shocks can be associated with widely different pass-throughs, but these are similar across models, with the largest value experienced in the case of monetary policy shocks. 

Giancarlo Corsetti, Emile Marin, 03 April 2020

In crises, the dollar tends to appreciate – especially against emerging market currencies – and dollar liquidity becomes scarce. This column shows that today’s events are following the historical pattern. Forex market turmoil is preceded by an inversion of the US yield curve as investors, anticipating tough times ahead, require relatively high short-term yields and an appreciation of relatively risky currencies until the disaster occurs. Then, the dollar appreciates sharply. Then, emerging markets suffer massive capital flight. What’s new about the COVID-19 crisis is its scale and speed.

Felipe Benguria, Alan M. Taylor, 03 March 2020

A perennial and fundamental macroeconomic question is whether financial crises are negative demand or supply shocks. This column discusses how the response of international trade flows and prices to financial crises can shed light on the debate. Evidence based on a new dataset of two centuries of financial crises and trade suggests financial crises are clearly negative shocks to demand.

Paolo Manasse, Graziano Moramarco, Giulio Trigilia, 17 February 2020

The pound depreciated overnight by about 7% against the euro and other main currencies following the Leave victory in the UK’s EU referendum, suggesting that the markets expected Brexit to harm the British economy. Yet currency markets hailed the overwhelming victory of Brexiter Boris Johnson’s Conservative Party in the 2019 general election with a 2% appreciation of the pound. This column argues that this apparent contradiction can be explained by disentangling the effects that politics has on exchange rate expectations and a political risk premium.

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