Valentina Bruno, Hyun Song Shin, 27 July 2021

The strength of the US dollar in currency markets has drawn the attention of researchers, policymakers, and businesses for decades. This column examines the effects of the dollar on international trade, with a particular focus on exports. A strong dollar dampens trade volumes through the financial channel, outweighing any improvement in trade competitiveness. Trade activity is strong when the dollar is weak, but global trade suffers when the dollar is strong.

Takatoshi Ito, Satoshi Koibuchi, Kiyotaka Sato, Junko Shimizu, Taiyo Yoshimi, 23 July 2021

The currency a firm chooses to invoice in reveals lessons on the prominence of that currency in the international sphere. This column presents survey data from Japanese overseas subsidiaries, highlighting how the use of Asian currencies has been growing steadily. The authors show that among Asian local currencies, Chinese renminbi and Thai baht are the most used currencies by Japanese subsidiaries. If these countries become increasingly important destination markets for regional countries, local currencies will be used more as trade invoice currency in Asia.

Giovanni Cespa, Antonio Gargano, Steven Riddiough, Lucio Sarno, 17 June 2021

The extent that trade volume can reveal asymmetric information among foreign exchange market participants is the subject of debate among economists, as are the questions surrounding how the dispersion of information can affect currency returns. This column presents new evidence that foreign exchange volume reveals insights into both issues. The authors find that a high level of information asymmetry exists across foreign exchange market participants, and that this asymmetry is independent of currencies’ average level of liquidity, volatility and volume.

Pasquale Della Corte, Lucio Sarno, Maik Schmeling, Christian Wagner, 17 May 2021

In fixed exchange rate systems, default risks tend to have devastating effects on currencies, usually leading to sharp devaluations. However, little is known about the relationship between default expectations and exchange rates in floating rate regimes. This column uses data from a broad set of currencies to uncover a strong link between exchange rate movements and sovereign risk across all exchange rate regimes. This relationship is largely caused by countries’ exposure to global sovereign risk factors and shown to be driven by changes in default expectations. 

Sebastian Edwards, Luis Cabezas, 08 April 2021

The nominal exchange rate plays a dual role in macroeconomic adjustments – it is part of the transmission mechanism of monetary policy, and it also helps accommodate external and domestic shocks through its effect on the real exchange rate. This column uses disaggregated price index data from Iceland to test how exchange rate pass-through varies with the international tradability of goods and with the monetary policy framework. It shows that pass-through is significantly higher for tradables relative to nontradables. In addition, it finds that improvements in the credibility of the central bank are associated with declines in the exchange rate pass-through. 

Raphael Auer, Ariel Burstein, Sarah Lein, 03 February 2021

In 2015, the Swiss National Bank discontinued the minimum exchange rate of the Swiss franc relative to the euro, prompting a large and sudden appreciation of the franc. This column describes how the episode affected border prices, retail prices, and consumer expenditure. It shows how cross-sectional variation in border price changes by currency of invoicing carried over to consumer prices and allocations. This episode can help inform estimates of the sensitivity of retail prices to border prices and the sensitivity of import expenditures to relative price movements. 

Lorenzo Forni, Philip Turner, 15 January 2021

Dollar bond issuance by non-US companies has dominated foreign borrowing since the global crisis. In many emerging markets, higher leverage and currency mismatches have increased the risk of corporate insolvencies and created new threats to the balance sheets of local banks. This column documents the financial risks created by these recent trends and outlines the necessary implications for regulatory policy. In addition to regulation, financial fragilities have added to demands for fiscal stimulus and led some emerging market central banks to ease monetary policy by buying government bonds, creating new links with fiscal policy. 

Eleonora Granziera, Markus Sihvonen, 26 November 2020

High short-term interest rates predict domestic currency appreciation and low excess returns for long-term bonds. These facts are at odds with two textbook conditions describing the relationship between different maturity interest rates and exchange rates: uncovered interest parity (UIP) and the expectations hypothesis. This column explains that both conditions can be reconciled with the data if agents are assumed to have sticky rather than perfectly rational expectations concerning short rates. It also demonstrates how this empirically motivated change in model assumptions has broad implications for interpreting the effects of monetary policy on exchange rates and yield curves.  

Sebastian Edwards, 10 November 2020

While today almost every advanced nation has a flexible exchange rate regime similar to that advocated by Milton Friedman, most emerging countries continue to have ‘conventional peg’. This column draws on the historical work of Milton Friedman to examine the conditions under which he thought that flexible rates were the right system for developing countries, and when he thought that it was appropriate to have an alternative regime. 

Puriya Abbassi, Falk Bräuning, 31 October 2020

The recent and persistent failure of covered interest parity is inconsistent with the standard view of international finance textbooks. Current thinking relates this violation mostly to supply-side effects. This column argues that demand effects associated with banks’ management of foreign exchange exposure are also an important but are often overlooked driver. This result has implications for the current policy debate concerning global funding and foreign exchange markets, as well as the important role of the US dollar in international finance and banking.

Emine Boz, Camila Casas, Georgios Georgiadis, Gita Gopinath, Helena Le Mezo , Arnaud Mehl, Tra Nguyen, 09 October 2020

Most global trade transactions are invoiced in just a few currencies, regardless of the countries involved in the transaction. This column presents a new dataset that offers a comprehensive and up-to-date understanding of trade invoicing patterns within the major currencies. It finds that vehicle currency use has been on the rise, with dollar invoicing increasing over time despite the decline in the share of global trade accounted for by the US, and euro invoicing also rising among certain countries (typically at the expense of the dollar). 

Silvana Tenreyro, 04 September 2020

Understanding the nature of the global economy remains an important and interesting topic of discussion for both policymakers and researchers. This column presents a summary of two recent evaluations of aspects of the open economy. The author summarises work concerning global currencies and trading networks, offering insights into how the research agenda on each area may evolve over the coming years. 

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.

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