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on Open Economy Macroeconomics |
| By: | Hélène Rey; Vania Stavrakeva; Jenny Tang |
| Abstract: | The paper explores empirically the tight links between exchange rates and the global network of equity holdings. Exchange rates can be expressed in terms of “equity net currency supplies”, i.e. local currency stock market capitalization minus equity holdings, denominated in investors’ currencies, as well as elasticities, reflecting the “centrality” of currencies in global equity markets. The observed components of our exchange rate decomposition account for, on average, 95% of the monthly variation of 28 bilateral currency crosses vis-à-vis the USD and 98% vis-à-vis the EUR. We use the decomposition to elucidate the unique role of the USD in transmitting risk aversion and U.S. macroeconomic news throughout the global equity network. Our findings contribute towards explaining global financial cycles and “risk-on”/“risk-off” episodes. |
| JEL: | F30 F32 F40 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33003 |
| By: | Carlos Alba; Julio A. Carrillo; Raúl Ibarra |
| Abstract: | This paper analyzes, using a VAR model, the effects of US central bank monetary policy announcements, and information shocks from this authority regarding its economic outlook on Mexican financial and macroeconomic variables. Shocks are identified by combining a high-frequency strategy with sign restrictions, which exploits the co-movement between the policy rate and the stock market in the US around FOMC announcements. A restrictive monetary policy shock in the US is identified by an increase in the interest rate and a drop in stock prices, while a positive information shock is identified when both variables rise simultaneously. The results show that positive information shocks from the US central bank improve financial conditions in Mexico, appreciate the peso/dollar exchange rate, lower the sovereign risk premium and forex volatility, and increase stock prices, real activity and prices in Mexico. In contrast, restrictive US monetary policy shocks tighten financial conditions, and reduce real activity and prices in Mexico. |
| Keywords: | Monetary policy;international policy transmission;high-frequency identification;central bank information;VAR model |
| JEL: | E43 E52 E58 F42 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bdm:wpaper:2024-14 |
| By: | Paul Bergin; Ling Feng; Ching-Yi Lin |
| Abstract: | While the trade literature has tended to view export activity and innovation as complementary activities, we present evidence that financial constraints are a reason the two activities can act as substitutes for small exporters. In particular, we find that small exporters have lower expenditure on R&D than comparable non-exporters, and we find a corresponding pattern in the leverage ratio of the capital structure of small firms. A model that combines firm decisions regarding the amount of innovation, exporting, and endogenous financial capital structure is able to account for these empirical findings. The model implies that small firms are unable to fully reap the gains from exporting due to financial constraints, as they reduce R&D to finance the costs of export participation. |
| JEL: | E44 F41 G32 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32904 |
| By: | Fabien Rondeau (Univ Rennes, CNRS, CREM – UMR6211, F-35000 Rennes France); Yushi Yoshida (Shiga Unversity) |
| Abstract: | The theoretical model a la Amiti, Itskhoki, and Konings (2014, AER) suggests that the inclusion of exporters’ market share and import intensity in the exchange rate pass-through regression is sufficient to reflect the underlying deep parameters. We suggest using value-added by importing and other countries and invoicing currency ratio as proxies for the import intensity measure. By examining 33 exporting countries and 13 importing countries for 18 industries between 1995 and 2018, our results show that exchange rate pass-through decreases for industries with a higher contribution of the other country’s value-added. Moreover, we find that a higher US dollar invoicing ratio decreases the exchange rate pass-through. |
| Keywords: | Exchange Rate Pass-through, Global Value Chains, Invoicing Currency, Market Share, Value-Added by Importers. |
| JEL: | F14 F61 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:tut:cremwp:2024-09 |
| By: | Rohan Kekre; Moritz Lenel |
| Abstract: | We study the source of exchange rate fluctuations using a general equilibrium model accommodating shocks in goods and financial markets. These shocks differ in their induced comovements between exchange rates, interest rates, and quantities. A calibration matching data from the U.S. and G10 currency countries implies that persistent shocks to relative demand, reflected in persistent interest rate differentials, account for 75% of the variance in the dollar/G10 exchange rate. Shocks to currency intermediation are important, however, in generating deviations from uncovered interest parity at high frequencies and explaining the dollar appreciation in crises. |
| JEL: | E44 F31 G15 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32976 |
| By: | Ekaterina Pirozhkova (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Giovanni Ricco (CREST, Ecole Polytechnique, 5 Av. Le Chatelier, 91120 Palaiseau, France); Nicola Viegi (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa) |
| Abstract: | Four factors drive the high-frequency impact of monetary policy announcements in South Africa: affecting short-, mid-, and long-term yield curve, as well as country risk. Controlling for information effects, we build IVs to study the transmission of conventional monetary policy, forward guidance, term premia, country risk and information shocks. Our findings reveal textbook contractionary effects of conventional monetary policy. Policy communication, particularly forward guidance, has persistent effects on output and prices. Country risk is a novel and powerful channel of monetary policy communication in emerging markets. By defending its independence, re-stating its inflation target objective, and addressing external shocks, the central bank can mitigate country risk and generate strong expansionary effects. |
| Keywords: | Monetary policy, Small Open Economy, Inflation Targeting, Exchange Rates. |
| JEL: | E5 F3 F4 C3 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:pre:wpaper:202442 |
| By: | Ariel Burstein; Sarah M. Lein; Jonathan Vogel |
| Abstract: | Consumers access foreign goods by purchasing them domestically or shopping abroad. We present new facts on cross-border shopping by Swiss households showing, for example, that prices of identical products are lower in neighboring countries, cross-border shopping shares fall with distance to the border, and price gaps and cross-border shopping shares rose following the 2015 Swiss Franc appreciation. We use a simple model of cross-border shopping to quantify how variation across space in cross-border shopping results in heterogeneous changes in cost-of-living in response to changes in international prices such as the 2015 Swiss Franc Appreciation and the 2020 Covid-19-related closing of the border. |
| JEL: | E31 F10 F41 F60 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33006 |
| By: | Ester Faia; Karen K. Lewis; Haonan Zhou |
| Abstract: | We re-examine monetary policy spillovers to Emerging Market Economies (EME) in the form of capital flow reversals, using sectoral-level securities holdings data for Euro Area investors. In response to a surprise monetary tightening, active investors such as investment funds re-balance their portfolios away from EME, while more passive, long term investors such as insurance funds and banks exhibit no significant reaction on average. For active investors, the reallocation out of EME appears stronger under synchronized monetary tightening between the Fed and the ECB. However, these investors may even inject more capital to EME securities when the monetary tightening surprises contain positive news about the Euro Area economy. Issuers' monetary-fiscal stability may explain the heterogeneous impact of these spillovers. |
| JEL: | E44 F32 F33 G15 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32986 |