Exchange Rates and Capital Flows
Friday, Jan. 4, 2019 8:00 AM - 10:00 AM
- Chair: Alexander Rodnyansky, University of Cambridge
Global Portfolio Rebalancing and Exchange Rates
AbstractWe examine international equity allocations at the fund level and show how different
returns on the foreign and domestic proportion of portfolios determine rebalancing behavior and trigger capital flows. We document the heterogeneity of rebalancing across fund types, its greater intensity under higher exchange rate volatility, and the exchange rate e¤ect of such rebalancing. The observed dynamics of equity returns, exchange rates, and fund-level capital flows are compatible with a model of incomplete FX risk trading in which exchange rate risk partially segments international equity markets.
Exchange Rate Shocks and Quality Adjustments
AbstractHow do firms change the quality composition of their traded goods in response to an exchange rate shock? Using data from a large Russian retailer that varies its offerings at high frequency, we document that ruble devaluations are associated with a reduction in the quality of goods the retailer imports for resale. Our results indicate that an increase in the retailer's costs, as opposed to a reduction in demand due to shrinking real incomes, is the driving force. We estimate a simple model to quantify the welfare impact of quality adjustments and find that preventing firms from downgrading overstates the welfare loss from the 2014 ruble devaluation by 34%, while incorporating cost heterogeneity but ignoring quality has an ambiguous effect on the welfare change.
- F3 - International Finance
- F4 - Macroeconomic Aspects of International Trade and Finance