The Quanto Theory of Exchange Rates

By Lukas Kremens and Ian Martin

American Economic Review, March 2019

We present a new identity that relates expected exchange rate appreciation to a risk-neutral covariance term, and use it to motivate a currency forecasting variable based on the prices of quanto index contracts. We show via panel regressions that the quan...

Capital Flows and Foreign Exchange Intervention

By Paolo Cavallino

American Economic Journal: Macroeconomics, April 2019

I consider a small open economy model where international financial markets are imperfect and the exchange rate is determined by capital flows. I use this framework to study the effects of portfolio flow shocks, derive the optimal foreign exchange interve...

Price Discovery in Cryptocurrency Markets

By Igor Makarov and Antoinette Schoar

AEA Papers and Proceedings, May 2019

We ask which markets drive bitcoin prices and how price discovery happens across different exchanges. Does the greater exuberance for cryptocurrencies outside the United States affect prices only on local markets or does it impact price formation on globa...

China versus the United States: IMS Meets IPS

By Emmanuel Farhi and Matteo Maggiori

AEA Papers and Proceedings, May 2019

Currently both the International Monetary System (IMS) and the International Price Systems (IPS) are dominated by the United States. The emergence of China, both as reserve currency and as a currency of invoicing, is likely to disrupt this status quo. We ...

The Rise of the Dollar and Fall of the Euro as International Currencies

By Matteo Maggiori, Brent Neiman, and Jesse Schreger

AEA Papers and Proceedings, May 2019

International currencies play important roles as foreign exchange reserves but are also most frequently used to denominate corporate and government bonds, bank loans, and import and export invoices. These currencies offer unrivaled liquidity, constituting...

Dollar Invoicing and the Heterogeneity of Exchange Rate Pass-Through

By Emine Boz, Gita Gopinath, and Mikkel Plagborg-Møller

AEA Papers and Proceedings, May 2019

We show empirically that the variation across country pairs in exchange rate pass-through and trade elasticity is meaningfully explained by the dollar's dominance as invoicing currency. We use a hierarchical Bayesian approach to directly and flexibly mode...

Exports and Invoicing: Evidence from the 2015 Swiss Franc Appreciation

By Raphael Auer, Ariel Burstein, Katharina Erhardt, and Sarah M. Lein

AEA Papers and Proceedings, May 2019

Do differences in border price adjustment by currency of invoicing carry over to allocations? We document the cross-industry variation in the response of Swiss export prices and export values by currency of invoicing of border prices in the aftermath of t...

Does Incomplete Spanning in International Financial Markets Help to Explain Exchange Rates?

By Hanno Lustig and Adrien Verdelhan

American Economic Review, June 2019

We assume that domestic (foreign) agents, when investing abroad, can only trade in the foreign (domestic) risk-free rates. In a preference-free environment, we derive the exchange rate volatility and risk premia in any such incomplete spanning model, as w...

The Dollar, Bank Leverage, and Deviations from Covered Interest Parity

By Stefan Avdjiev, Wenxin Du, Cathérine Koch, and Hyun Song Shin

American Economic Review: Insights, September 2019

We document a triangular relationship in that a stronger dollar goes hand in hand with larger deviations from covered interest parity (CIP) and contractions of cross-border bank lending in dollars. We argue that underpinning the triangle is the role of th...

Dominant Currency Paradigm

By Gita Gopinath, Emine Boz, Camila Casas, Federico J. Díez, Pierre-Olivier Gourinchas, and Mikkel Plagborg-Møller

American Economic Review, March 2020

We propose a "dominant currency paradigm" with three key features: dominant currency pricing, pricing complementarities, and imported inputs in production. We test this paradigm using a new dataset of bilateral price and volume indices for more than 2,5...

Bond Convenience Yields and Exchange Rate Dynamics

By Rosen Valchev

American Economic Journal: Macroeconomics, April 2020

This paper proposes a new explanation for the failure of Uncovered Interest Parity (UIP) that rationalizes both the classic UIP puzzle and the evidence that the puzzle reverses direction at longer horizons. In the model, excess currency returns arise as c...

The Dollar, Bank Leverage, and Real Economic Activity: An Evolving Relationship

By Burcu Erik, Marco J. Lombardi, Dubravko Mihaljek, and Hyun Song Shin

AEA Papers and Proceedings, May 2020

The interest in how financial conditions affect real economic activity has grown since the great financial crisis (GFC), not least because some of the mechanisms at play in the financial sector may have changed. We shed light on this issue by examining th...

Shining a Light on Purchasing Power Parities

By Maxim Pinkovskiy and Xavier Sala-i-Martin

American Economic Journal: Macroeconomics, October 2020

We use satellite-recorded nighttime lights as an independent benchmark of economic activity in order to generate three findings in the study of PPP-adjusted estimates of GDP. First, PPP-adjusted estimates better describe poor economies than do market exch...

Beyond Competitive Devaluations: The Monetary Dimensions of Comparative Advantage

By Paul R. Bergin and Giancarlo Corsetti

American Economic Journal: Macroeconomics, October 2020

Motivated by the long-standing debate on competitive devaluation, we propose a new perspective on how monetary and exchange rate policies can contribute to a country's international competitiveness. We refocus the analysis on the implications of monetary ...

After the Panic: Are Financial Crises Demand or Supply Shocks? Evidence from International Trade

By Felipe Benguria and Alan M. Taylor

American Economic Review: Insights, December 2020

Are financial crises a negative shock to aggregate demand or supply? This is a fundamental question for research and policy making. Arguments for stimulus usually presume demand-side shortfalls; arguments for tax cuts or structural reform look to the supp...

Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others

By Lars E.O. Svensson

Journal of Economic Perspectives, Fall 2003

Existing proposals to escape from a liquidity trap and deflation, including my "Foolproof Way," are discussed in the light of the optimal way to escape. The optimal way involves three elements: (1) an explicit central-bank commitment to a higher future pr...

Exchange Rates and Prices: Evidence from the 2015 Swiss Franc Appreciation

By Raphael Auer, Ariel Burstein, and Sarah M. Lein

American Economic Review, February 2021

We dissect the impact of a large and sudden exchange rate appreciation on Swiss border import prices, retail prices, and consumer expenditures on domestic and imported nondurable goods, following the removal of the EUR/CHF floor in January 2015. Cross-sec...

Tariff Pass-Through at the Border and at the Store: Evidence from US Trade Policy

By Alberto Cavallo, Gita Gopinath, Brent Neiman, and Jenny Tang

American Economic Review: Insights, March 2021

We use microdata collected at the border and the store to characterize the price impact of recent US trade policy on importers, exporters, and consumers. At the border, import tariff pass-through is much higher than exchange rate pass-through. Chinese exp...

The Macroeconomic Effects of Oil Supply News: Evidence from OPEC Announcements

By Diego R. Känzig

American Economic Review, April 2021

This paper studies how changes in oil supply expectations affect the oil price and the macroeconomy. Using a novel identification design, exploiting institutional features of OPEC and high-frequency data, I identify an oil supply news shock. These shocks ...

The Purchasing Power Parity Debate

By Alan M. Taylor and Mark P. Taylor

Journal of Economic Perspectives, Fall 2004

Originally propounded by the sixteenth-century scholars of the University of Salamanca, the concept of purchasing power parity (PPP) was revived in the interwar period in the context of the debate concerning the appropriate level at which to reestablish i...