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. 

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.

Rui Costa, Swati Dhingra, Stephen Machin, 01 October 2019

Some commentators argue that globalisation is systematically connected to the real-wage and productivity stagnation seen across the developed world. This column analyses the relationship between international trade and worker outcomes in the immediate aftermath of the Brexit referendum, when the value of the sterling fell massively against other nations’ currencies. It finds that the rise in import costs from the sterling depreciation hurt wages and training. This relative decline in real earnings of workers has reinforced pre-existing real-wage stagnation; UK workers have not fared well since the referendum price rise.

Philippe Bacchetta, Eric van Wincoop, 08 September 2019

The forward premium puzzle is one of many ways in which exchange rate behaviour can contradict economic theory. This column introduces a model in which delayed portfolio adjustment by investors can address six such puzzles of exchange rate movements. The findings show that slowness in the reactions of investors has the potential to influence asset prices.

Linda Goldberg, 26 February 2019

Linda Goldberg of the Federal Reserve of New York talks about her work with Signe Krogstrup on a combined exchange market pressure index, which they use to look at the importance of the global factor in international flows.

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.

Mário Centeno, Miguel Castro Coelho, 06 June 2018

Portugal has turned a corner. Having gone through a mild boom, a slump, and a severe recession, all packed into less than two decades, the Portuguese economy has re-emerged with a newfound strength. This column examines this recovery in detail, focusing on important structural reforms that have taken place in the last couple of decades in key areas such as skills, investment, export orientation, labour market, financial intermediation, and public finances. The effects of these reforms were compounded by time as well as efforts to reignite demand.

Natalie Chen, 08 May 2018

Exchange rate movements pass through to the prices consumers pay domestically. Natalie Chen discusses how, in order to understand the relationship between exchange rates and domestic inflation, we must look beyond the bilateral exchange rates between importing and exporting countries. What is key is the exchange rate movement between the importing currency and the one in which goods are invoiced.

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.

Filippo di Mauro, Vlad Demian, Jan-Paul van de Kerke, 08 December 2017

It is well-established in theoretical and empirical models that an exchange rate movement affects exports, but we are far from a consensus on the size and relevance of this effect. Macro-based analyses tend to yield very low values for the elasticity of exports to the exchange rate, while micro- or sectoral-based estimations tends to be higher. This column shows that one reason for the disagreement is that macro estimations fail to incorporate the characteristics of the underlying distribution of firm productivity and its asymmetries. Doing so generates higher elasticity estimates than the macro estimations, and greater country-level diversification.

Cécile Couharde, Anne-Laure Delatte, Carl Grekou, Valérie Mignon, Florian Morvillier, 02 September 2017

Academics have traditionally computed their own measure for assessing whether a currency is over- or undervalued, while policymakers rely on scarce public information with inconsistent data. This column introduces a new database, EQCHANGE, which includes nominal and real effective exchange rates, as well as equilibrium real effective exchange rates for more than 180 countries from 1973 onwards. It represents the longest and largest publicly available database on equilibrium exchange rates and corresponding misalignments.

Willem Thorbecke, Atsuyuki Kato, 01 July 2017

Since 2007, there have been large changes in the Swiss franc. This column shows that exchange-rate appreciations do not affect the exports, profits, or stock returns of Swiss companies making sophisticated products. In contrast, rises in the franc decrease the exports, profits and stock returns of firms producing medium-high-technology goods. An economy’s production structure is important for weathering exchange-rate fluctuations.

Gita Gopinath, 31 May 2017

Exchange rates matter for international trade. In this video, Gita Gopinath discusses the importance of the dollar. This video was recorded at the Royal Economic Society Annual Conference held in Bristol in April 2017.

Atish R. Ghosh, Jonathan D. Ostry, Mahvash S. Qureshi, 12 May 2017

There has been growing recognition that emerging markets may benefit from more proactive management of capital flows, and thus avoid crises when the flows recede. But do they do this in practice? By analysing policy responses in a sample of emerging markets, this column argues that central banks respond to capital inflows through various tools. Ironically, the most commonly prescribed instrument for coping with capital inflows – tighter fiscal policy – is the least-used tool in practice.

Lionel Fontagné, Philippe Martin, Gianluca Orefice, 07 April 2017

With Brexit and the election of Donald Trump, tariffs and exchange rates are back at the centre stage of policy debates. This column revisits the assumptions economists make when estimating how tariffs and exchange rates affect exporters’ performance. It argues that the elasticity of firm-level exports to firm-level export prices is an important factor that should be taken into account. Using French firm-level data, it finds that exporters react even more strongly to firm-level electricity cost shocks than to tariff or exchange rate shocks.

Willem Buiter, 22 March 2017

A border tax adjustment from origin-based taxation to destination-based taxation is under consideration for corporate profit tax in the US. This column investigates the implications of such an adjustment for the nominal exchange rate, assuming the real equilibrium of the economy is unchanged. While conventional wisdom is that the currency of the country implementing the adjustment will appreciate by a percentage equal to the VAT or corporate profit tax rate, a depreciation of the same magnitude is just as likely. 

Yan Carrière-Swallow, Bertrand Gruss, Nicolas Magud, Fabian Valencia, 13 March 2017

The rate at which consumer prices rise following a depreciation of the currency, known as the exchange rate pass-through, has been declining. The column uses a decomposition of exchange rate pass-through into the component that can be attributed to pricing of imported goods at the dock, and the second-round effects on domestically produced goods and services, to show that reductions in second-round effects are largely responsible for the decline in pass-through. Enhanced monetary policy credibility is strongly associated with this reduction. 

Kazunobu Hayakawa, HanSung Kim, Taiyo Yoshimi, 05 March 2017

Some exporters prefer to use most-favoured nation rates even when exporting to a fellow member of a free trade agreement. This column analyses the effect of exchange rates on the utilisation of free trade agreements, focusing on the ASEAN-Korea agreement. A depreciation of an (ASEAN) exporter’s currency against the (Korean) importer’s currency enhances utilisation rates of the trade agreement’s tariffs, with implications for the design of rules of origin. 

Michele Ca' Zorzi, Marcin Kolasa, Michał Rubaszek, 03 March 2017

Macroeconomic models have been criticised for their inability to forecast exchange rates better than the random walk model. This column argues that open-economy DGSE models are useful in forecasting the real exchange rate but not the nominal exchange rate, owing to their failure to capture adequately the international co-movement of prices. They correctly predict, however, that the bulk of the real exchange rate adjustment occurs through the nominal rate. The central role of the nominal rate in restoring price competitiveness in flexible exchange rate regimes can be exploited from a forecasting perspective. 



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