Exchange rates

Francois de Soyres, Erik Frohm, Vanessa Gunnella, Elena Pavlova, 09 October 2018

When a country’s currency depreciates, its export volumes are expected to increase. Yet some recent episodes suggest that exports now barely respond to significant exchange rate movements. This column argues that global value chains are an important part of the answer, as countries now need to import to export, and often re-import their exports. To assess the consequences of international input-output linkages on exchange rate elasticities, policymakers need indices of global value chain participation based on currencies rather than countries.

Laura Alfaro, Alejandro Cuñat, Harald Fadinger, Yanping Liu, 02 October 2018

Real exchange rate devaluations are typically seen as a viable development strategy, but the effectiveness of the approach may vary over time and across countries. This column explores this issue by focusing on the microeconomics of firm-level responses to exchange rate fluctuations. Results show varying patterns of responses to fluctuations by region and by import/export orientation. These results highlight the crucial role of a firm’s integration in global value chains.

Signe Krogstrup, Cédric Tille, 29 August 2018

Volatility in international capital flows can disrupt international trade and finance. This column explores the role of agents’ exposure to risk in this dynamic, focusing on domestic financial firms. It finds that the impact of an increase in risk aversion on foreign currency funding is conditional on the bank’s initial net currency exposure. This suggests that the empirical link from global factors to cross-border bank funding depends on country-specific characteristics of financial institutions.

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.

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