Exchange rates

Andres Blanco, Javier Cravino, 17 August 2018

Economists have often interpreted the observation that movements in real exchange rates are large, persistent, and closely track movements in nominal rates while cross-country differences in inflation rates are small and stable as direct evidence for nominal price rigidities. This column uses the microdata behind the construction of the consumer price index to isolate the real exchange rate for the subset of goods that change prices. This ‘reset exchange rate’ moves with the real exchange rate, suggesting that sticky prices are not a primary factor in dampening the response of inflation to exchange rate shocks.

Matthieu Bussière, Menzie Chinn, Laurent Ferrara, Jonas Heipertz, 05 July 2018

The ‘Fama puzzle’ is the finding that ex post depreciation and interest differentials are negatively correlated, contrary to what theory suggests. This column re-examines the puzzle for eight advanced country exchange rates against the US dollar, over the period up to February 2016. The rejection of the joint hypothesis of uncovered interest parity and rational expectations still occurs, but with much less frequency. In contrast to earlier findings, the Fama regression coefficient is positive and large in the period after the Global Crisis, but survey-based measures of exchange rate expectations reveal greater evidence in favour of uncovered interest parity.

Stefan Gerlach, 04 April 2018

It was generally expected that the new US administration’s economic policies would lead to an appreciation of the US dollar. Yet the opposite has happened. This column argues that a large part of the fluctuations of the US dollar against the euro since the election of President Trump can be tied to movements in the relative attractiveness of holding US dollars versus the euro.

Linda Goldberg, Signe Krogstrup, 05 March 2018

The role of the global financial factor in the international monetary system has been well discussed, with some economists suggesting its role may in fact be overstated. This column argues that some of the empirical evidence on the role of global factors in driving capital flows and exchange rates across countries may be inaccurate because it has ignored key features of the operation of central banks. The authors propose a new metric – a recast exchange market pressure index which captures country-specific capital flow pressures in a way that is comparable across countries with different exchange rate regimes.

Marcel Fratzscher, Lukas Menkhoff, Lucio Sarno, Tobias Stöhr, 23 February 2018

Central bank interventions in foreign exchange markets have long been viewed with scepticism by academics. This column examines foreign exchange interventions for a sample of 33 advanced and developing economies. Interventions occur frequently, in episodes that can last several days, and are often successful in smoothing exchange rates. These results show that central bankers, particularly in emerging markets, appreciate the efficacy of interventions.

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