International Macroeconomics and Finance

Paper Session

Friday, Jan. 6, 2017 10:15 AM – 12:15 PM

Sheraton Grand Chicago, Colorado
Hosted By: International Economics and Finance Society
  • Chair: Nelson Mark, University of Notre Dame

Exchange Rate Prediction Redux

Menzie Chinn
,
University of Wisconsin-Madison
Yin-Wong Cheung
,
City University of Hong Kong
Antonio Garcia Pascual
,
Barclays
Yi Zhang
,
University of Wisconsin-Madison

Abstract

We conduct a systematic appraisal of the predictive power of several traditional and nontraditional structural models of exchange rate determination, including purchasing power parity, the sticky-price monetary model with and without risk and liquidity factors, and a model with Taylor rule fundamentals. Our sample encompasses the global financial crisis of 2008 and the ensuing period of low interest rates. We utilize specifications assuming co-integration and no co-integration, and evaluate out-of-sample performance over several out-of-sample periods.

World Asset Markets and the Global Financial Cycle

Helene Rey
,
London Business School

Abstract

We analyse the workings of the ``Global Financial Cycle", i.e. the joint dynamics of US monetary policy, domestic economic conditions, and global financial variables such as credit spreads, cross-border credit flows, bank leverage and global asset prices. One global factor, reflecting aggregate volatility and the time-varying degree of market-wide risk aversion explains an important part of the variance of a large cross section of returns of risky assets around the world. We find evidence of large monetary policy spillovers from the US to the rest of the world.

After the Tide: Commodity Currencies and Global Trade

Nikolai Roussanov
,
University of Pennsylvania
Robert Ready
,
University of Rochester
Colin Ward
,
University of Minnesota

Abstract

The decade prior to the Great Recession saw a boom in global trade, including a rapid rise in commodity prices, trade volumes, and, consequently, in the cost of transporting goods around the world. At the same time currencies of commodity-exporting currencies appreciated, boosting the carry trade profits in foreign exchange markets. The onset of the Global Recession led to a sharp reversal in all of these trends, with only a weak recovery subsequently. We account for these facts using a two-country general equilibrium model of commodity trade and currency pricing. Our model features specialization in trade and a time-varying trade friction that arises from low frequency movements in shipping capacity, and therefore endogenously generates time-varying dynamics in global market segmentation. Slow adjustment in the shipping sector implies that following a boom and then a bust both trade costs and the carry trade risk premium remain low, even as output and trade volumes recover. We verify this prediction of the model using measures of global shipping costs.

International Spillovers and Local Credit Cycles

Yusuf Soner Baskaya
,
Central Bank of the Republic of Turkey
Julian di Giovanni
,
Pompeu Fabra University, BGSE, CREI, and CEPR
Sebnem Kalemli-Ozcan
,
University of Maryland, CEPR, and NBER
Mehmet Fatih Ulu
,
Central Bank of the Republic of Turkey

Abstract

We show that capital inflows lead to a decrease in the real cost of borrowing and a credit expansion in an emerging market, Turkey, during 2003{2013. Instrumenting capital inflows by changes in global risk appetite implied by VIX, and using a matched firm-bank-loan level dataset
covering the universe of corporate loans, we show that a fall in VIX pushes capital inflows into Turkey, leading to an exogenous decline in real interest rates and an associated expansion in domestic credit supply. Our estimates explain 40% of the observed aggregate corporate credit
growth during capital inflow episodes. We identify heterogeneous impacts, such that financially constrained and risky firms, which are small and low net worth, can borrow relatively more at a lower real interest rate than large/high net worth firms, when VIX is low. These firms
obtain relatively lower rates especially from banks that largely fund themselves in international markets, while there is no differential in the relative borrowing amounts from these banks. These findings highlight a unique international transmission mechanism, by which global risk appetite
passes through to domestic firms' borrowing costs via the banking sector.
JEL Classifications
  • F3 - International Finance
  • F4 - Macroeconomic Aspects of International Trade and Finance