Exchange rates

Oleg Itskhoki, Dmitry Mukhin, 16 May 2022

Despite an increasing number of sanctions imposed on the Russian economy since its invasion of Ukraine in February 2022, the ruble has appreciated back to its pre-war level. This column argues that the prevalence of import over export sanctions and the financial repression imposed in Russia, which lowered the local demand for foreign currency, have driven the appreciation. Despite the opposite effects on the exchange rate, the sanctions on imports and exports are equivalent in terms of their impact on consumption, welfare, and government fiscal losses. Nonetheless, the level of the exchange rate remains relevant for imports, savings, and monetary policy.

Alexander Mihailov, 29 March 2022

In response to sanctions imposed on Russia following the invasion of Ukraine, President Putin recently announced that ‘unfriendly’ countries would have to pay for Russian gas (and perhaps oil in the future) in roubles. This column discusses the possible reasons for the announcement and the potential economic and financial implications if Putin were to follow through on it. 

Oleg Itskhoki, Dmitry Mukhin, 17 January 2022

The Mussa puzzle refers to the existence of a large and sudden jump in the volatility of the real exchange rate after the adoption of a floating exchange rate regime in 1973. It is a central piece of evidence in favour of monetary non-neutrality. In contrast to conventional wisdom, this column argues that the puzzle cannot be explained with sticky prices, and instead provides strong evidence in favour of monetary transmission via the financial market. This has important consequences for the design of optimal monetary and exchange rate policy.

John Hooley, Mika Saito, 06 December 2021

During the COVID-19 pandemic, the debate on monetary financing has been reignited and several economists have called for governments to borrow from their central banks to finance larger deficits. This column looks to sub-Saharan Africa, a region where ‘fiscal dominance’ has long been widespread, for useful insights into this debate. It finds that central bank financing of government does have an inflationary impact through the exchange rate channel. Numerical legal limits on central bank financing can be an effective way to mitigate the risks, even if they are not always binding.  

Konstantin Egorov, Dmitry Mukhin, 19 November 2021

Recent evidence shows that most international prices are set in dollars, leading to highly asymmetric spillovers between the US and other economies. This column discusses the normative implications of this fact. The authors argue that inflation targeting is optimal in non-US economies, while the use of capital controls is not. A depreciation of the dollar is unlikely to cause a currency war, but US policy does not fully internalise global spillovers. The US benefits from the dominant status of its currency.      

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