Understanding the Gains from Wage Flexibility: The Exchange Rate Connection

By Jordi Galí and Tommaso Monacelli

American Economic Review, December 2016

We study the gains from increased wage flexibility using a small open economy model with staggered price and wage setting. Two results stand out: (i) the effectiveness of labor cost reductions as a means to stimulate employment is much smaller in a curren...

Income-Induced Expenditure Switching

By Rudolfs Bems and Julian di Giovanni

American Economic Review, December 2016

This paper shows that an income effect can drive expenditure switching between domestic and imported goods. We use a unique Latvian scanner-level dataset, covering the 2008-2009 crisis, to document several empirical findings. First, expenditure switching ...

Trying to Understand the PPPs in ICP 2011: Why Are the Results So Different?

By Angus Deaton and Bettina Aten

American Economic Journal: Macroeconomics, January 2017

Purchasing power parity exchange rates, or PPPs, are price indexes that summarize prices in each country relative to a numeraire country, typically the United States. These numbers are used to compare living standards across countries, by academics in stu...

Price Setting in Online Markets: Basic Facts, International Comparisons, and Cross-Border Integration

By Yuriy Gorodnichenko and Oleksandr Talavera

American Economic Review, January 2017

We document basic facts about prices in online markets in the United States and Canada, which is a rapidly growing segment of the retail sector. Relative to prices in regular stores, prices in online markets are more flexible and exhibit stronger pass-thr...

Nominal Exchange Rate Determinacy under the Threat of Currency Counterfeiting

By Pedro Gomis-Porqueras, Timothy Kam, and Christopher Waller

American Economic Journal: Macroeconomics, April 2017

We study the endogenous choice to accept fiat objects as media of exchange and their implications for nominal exchange rate determination. We consider a two-country environment with two currencies that can be used to settle any transactions. However, curr...

International Monetary Relations: Taking Finance Seriously

[Symposium: The Global Monetary System]

By Maurice Obstfeld and Alan M. Taylor

Journal of Economic Perspectives, Summer 2017

In this essay, we highlight the interactions of the international monetary system with financial conditions, not just with the output, inflation, and balance of payments goals usually discussed. We review how financial conditions and outright financial cr...

Demand for Value Added and Value-Added Exchange Rates

By Rudolfs Bems and Robert C. Johnson

American Economic Journal: Macroeconomics, October 2017

We examine how cross-border input linkages shape the response of demand for value added to international relative price changes. We define a novel value-added real effective exchange rate (REER), which aggregates bilateral value-added price changes. Spill...

The Costs of Sovereign Default: Evidence from Argentina

By Benjamin Hébert and Jesse Schreger

American Economic Review, October 2017

We estimate the causal effect of sovereign default on the equity returns of Argentine firms. We identify this effect by exploiting changes in the probability of Argentine sovereign default induced by legal rulings in the case of NML Capital, Ltd. v. Repub...

Beggar-Thy-Neighbor Effects of Exchange Rates: A Study of the Renminbi

By Aaditya Mattoo, Prachi Mishra, and Arvind Subramanian

American Economic Journal: Economic Policy, November 2017

This paper estimates the effect of China's exchange rate changes on exports of developing countries in third markets. The degree of competition between China and its developing country competitors in specific products and destinations plays a key role in ...

The Distributional Consequences of Large Devaluations

By Javier Cravino and Andrei A. Levchenko

American Economic Review, November 2017

We study the impact of large exchange rate devaluations on the cost of living at different points on the income distribution. Poor households spend relatively more on tradeable product categories and consume lower-priced varieties within categories. Cha...

Fiscal Unions

By Emmanuel Farhi and Iván Werning

American Economic Review, December 2017

We study cross-country risk sharing as a second-best problem for members of a currency union using an open economy model with nominal rigidities and provide two key results. First, we show that if financial markets are incomplete, the value of gaining acc...

Export Destinations and Input Prices

By Paulo Bastos, Joana Silva, and Eric Verhoogen

American Economic Review, February 2018

This paper examines the relationship between the destination of exports and the input prices paid by firms, using detailed customs and firm-product-level data from Portugal. Both ordinary least squares regressions and an instrumental-variable strategy usi...

Exchange Rates and the Working Capital Channel of Trade Fluctuations

By Valentina Bruno, Se-Jik Kim, and Hyun Shin

AEA Papers and Proceedings, May 2018

Exchange rates affect the economy not only through the competitiveness of exports but also through a financial channel. The financial channel goes in the opposite direction to the competitiveness channel in that a stronger currency goes hand-in-hand with ...

Foreign Safe Asset Demand for US Treasurys and the Dollar

By Zhengyang Jiang, Arvind Krishnamurthy, and Hanno Lustig

AEA Papers and Proceedings, May 2018

We present theory showing that the spot dollar exchange rate reflects the value of all future convenience yields that foreign investors assign to US Treasuries. The convenience yield also creates wedge, the Treasury-based dollar basis, between the yield o...

Trade Invoicing, Bank Funding, and Central Bank Reserve Holdings

By Gita Gopinath and Jeremy C. Stein

AEA Papers and Proceedings, May 2018

We develop a model that shows how the currency denomination of a country's imports influences the funding structure of its banking system, and in turn, the currency composition of its central bank's reserve holdings. The link between the dollar's role in ...

Wealth Redistribution after Exchange Rate Devaluations

By Andres Drenik, Gustavo Pereira, and Diego J. Perez

AEA Papers and Proceedings, May 2018

We document that the likelihood of having assets in foreign currency is increasing in households' income within many emerging economies. This pattern leads to heterogeneous exposures of wealth to exchange rate movements. We analyze the redistribution of l...

The Geographic Spread of a Large Devaluation

By Javier Cravino and Andrei A. Levchenko

AEA Papers and Proceedings, May 2018

Cravino and Levchenko (2017) establish that the 1994 Mexican peso devaluation raised the prices of consumption baskets of low-income households substantially more than the prices of the consumption baskets of high-income households. In this paper, we expl...

Real Exchange Rates and Sectoral Productivity in the Eurozone

By Martin Berka, Michael B. Devereux, and Charles Engel

American Economic Review, June 2018

We investigate the link between real exchange rates and sectoral TFP for eurozone countries. We show that real exchange rate variation, both cross-country and time-series, closely accords with an amended Balassa-Samuelson interpretation, incorporating sec...

The Twin Ds: Optimal Default and Devaluation

By Seunghoon Na, Stephanie Schmitt-Grohé, Martín Uribe, and Vivian Yue

American Economic Review, July 2018

A salient characteristic of sovereign defaults is that they are typically accompanied by large devaluations. This paper presents new evidence of this empirical regularity known as the Twin Ds and proposes a model that rationalizes it as an optimal policy ...

When Is Foreign Exchange Intervention Effective? Evidence from 33 Countries

By Marcel Fratzscher, Oliver Gloede, Lukas Menkhoff, Lucio Sarno, and Tobias Stöhr

American Economic Journal: Macroeconomics, January 2019

This paper examines foreign exchange intervention based on novel daily data covering 33 countries from 1995 to 2011. We find that intervention is widely used and an effective policy tool, with a success rate in excess of 80 percent under some criteria. Th...