|
on International Finance |
| By: | Demir, Ishak |
| Abstract: | While Federal Reserve continues to normalize its monetary policy on the back of a strengthening U.S. economy, the possibility of mimicking U.S. policy actions and so the debate of monetary autonomy has been particularly heated in the most of developing countries, even in advanced economies. We analyse the role played by country-specific characteristics in domestic monetary policy autonomy to set short-term interest rates in the face of spillovers from of U.S. monetary policy as global external shocks. First, we extricate the non-systematic (non-autonomous) component of domestic interest rates which is related to business cycle synchronisation across countries. Then we employ an interacted panel VAR model, which allows impulse response functions to vary by country characteristics for a broad sample of countries. We find strong empirical evidence for the role of exchange rate flexibility, capital account openness in line with trilemma, but also a significant role for other country characteristics, such as dollarisation in the financial system, the presence of a global bank, use of macroprudential policies, and the credibility of fiscal and monetary policy. |
| Keywords: | monetary policy autonomy,global financial cycle,international spillovers,trilemma,country-specific characteristics,cross-country difference,dilemma |
| JEL: | C38 E43 E52 E58 F42 G12 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:193694&r=all |
| By: | José Renato Haas Ornelas; Roberto Baltieri Mauad |
| Abstract: | This paper provides empirical evidence of the predictive power of the currency implied volatility term structure (IVTS) on exchange rate behavior from both cross-section and time-series perspectives. Intriguingly, the direction of the prediction is not the same for developed and emerging markets. For developed markets, a high slope means low future returns, while for emerging markets this means high future returns. In order to analyze predictability from a cross-section perspective, we build portfolios based on the slope of the term structure, and thus present a new currency trading strategy. For developed (emerging) currencies, we buy (sell) the two currencies with the lowest slopes and sell (buy) those two with the highest slopes. The proposed strategy performs better than common currency strategies - carry trade, risk reversal and volatility risk premium - based on the Sharpe ratio, considering only currency returns, which supports the exchange rate predictability of the IVTS from a cross-section perspective |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:492&r=all |