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on International Finance |
| By: | Lewis, John (Bank of England) |
| Abstract: | Using a large data set of import volumes and values for goods imports from around 50 trading partners, and 3,000 goods type, this paper finds that the micro level, passthrough is non-linear in the exchange rate. The passthrough of larger bilateral exchange rate movements (ie more than 5%) is around four times larger than that of smaller changes. However, regressions on aggregate data indicate that passthrough at the macro level is close to full. The resolution to this apparent puzzle lies in the fact that larger bilateral movements account for the vast majority of variation in the exchange rate index, and hence the non-linearity at the micro level largely disappears at the macro level. |
| Keywords: | Exchange rate passthrough; Big Data; non-linearity |
| JEL: | E31 F14 F41 |
| Date: | 2016–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0579&r=ifn |
| By: | Lukasz Rachel (Department of Economics, London School of Economics (LSE); Centre for Macroeconomics (CFM); Bank of England); Thomas Smith (Bank of England) |
| Abstract: | Long-term real interest rates across the world have fallen by about 450 basis points over the past 30 years. The co-movement in rates across both advanced and emerging economies suggests a common driver: the global neutral real rate may have fallen. In this paper we attempt to identify which secular trends could have driven such a fall. Although there is huge uncertainty, under plausible assumptions we think we can account for around 400 basis points of the 450 basis points fall. Our quantitative analysis highlights slowing global growth as one force that may have pushed down on real rates recently, but shifts in saving and investment preferences appear more important in explaining the long-term decline. We think the global saving schedule has shifted out in recent decades due to demographic forces, higher inequality and to a lesser extent the glut of precautionary saving by emerging markets. Meanwhile, desired levels of investment have fallen as a result of the falling relative price of capital, lower public investment, and due to an increase in the spread between risk-free and actual interest rates. Moreover, most of these forces look set to persist and some may even build further. This suggests that the global neutral rate may remain low and perhaps settle at (or slightly below) 1% in the medium to long run. If true, this will have widespread implications for policymakers — not least in how to manage the business cycle if monetary policy is frequently constrained by the zero lower bound. |
| Keywords: | Equilibrium interest rate, long-term yields, globalsaving and investment, global trend |
| JEL: | E02 E10 E20 E40 E50 E60 F00 F41 F42 F47 J11 O30 O40 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1605&r=ifn |
| By: | Bhattarai, Saroj (University of Texas at Austin); Chatterjee, Arpita (University of New South Wales); Park, Woong Yong (University of Illinois at Urbana-Champaign) |
| Abstract: | We estimate international spillover effects of US Quantitative Easing (QE) on emerging market economies. Using a Bayesian VAR on monthly US macroeconomic and financial data, we first identify the US QE shock with non-recursive identifying restrictions. We estimate strong and robust macroeconomic and financial impacts of the US QE shock on US output, consumer prices, long-term yields, and asset prices. The identified US QE shock is then used in a monthly Bayesian panel VAR for emerging market economies to infer the spillover effects on these countries. We find that an expansionary US QE shock has significant effects on financial variables in emerging market economies. It leads to an exchange rate appreciation, a reduction in long-term bond yields, a stock market boom, and an increase in capital inflows to these countries. These effects on financial variables are stronger for the “Fragile Five” countries compared to other emerging market economies. We however do not find significant effects of the US QE shock on output and consumer prices of emerging markets. |
| JEL: | C31 E44 E52 E58 F32 F41 F42 |
| Date: | 2015–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:255&r=ifn |
| By: | Stavrakeva, Vania (London Business School); Tang, Jenny (Federal Reserve Bank of Boston) |
| Abstract: | Financial markets regard exchange rate movements as conveying information about future expected policy rates. This paper explores the empirical link between conventional and unconventional monetary policy surprises and exchange rate fluctuations at a quarterly frequency. It examines these links using the currencies of ten developed economies calculated against four base currencies: the U.S. dollar, the British pound, the Deutschmark/euro, and the Japanese yen. Two periods are studied: 1990:Q1–2008:Q4, when the U.S. dollar hit the zero lower bound (ZLB) in December 2008, and the ZLB period between 2009:Q1 and 2015:Q1. The authors decompose exchange rate movements using a standard no-arbitrage asset pricing equation and two alternate interest rate forecasting models—a standard Taylor rule and a yield factor model. This decomposition reveals how contemporaneous unanticipated monetary policy surprises and changes in the expected future paths of policy are linked to exchange rate changes directly through relative interest rates as well as indirectly through expected excess returns and expected long-run exchange rate levels. The authors also use this decomposition to measure the fractions of the estimated effects of conventional and unconventional monetary policy surprises on exchange rate changes that are due to each component of the exchange rate change. |
| JEL: | E43 F31 G12 G15 |
| Date: | 2015–10–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:15-16&r=ifn |
| By: | Diez, Federico J. (Federal Reserve Bank of Boston); Gopinath, Gita (Harvard University) |
| Abstract: | Since 2014:Q3, the U.S. dollar has experienced the third-fastest appreciation in over 30 years, with its nominal exchange and real exchange rate rising 15 percent against almost all foreign currencies (as measured by the Major Currencies Dollar Index). This sudden and rapid gain has engendered concerns about how a stronger dollar will affect U.S. export and import prices and ultimately, consumer prices and inflation in the United States. This paper assembles a rich database, spanning the period from 1985:Q1 through 2014:Q4, that combines several measures of prices and exchange rates in order to examine the likely outlook for U.S. import and export prices and consumer prices in the short run (one quarter) and over a 24-month period. |
| Keywords: | exchange rates; pass-through; inflation |
| JEL: | E31 F31 F41 |
| Date: | 2015–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbcq:2015_009&r=ifn |
| By: | Fatum, Rasmus (University of Alberta); Liu, Runjuan (University of Alberta); Tong, Jiadong (Nankai University); Xu, Jiayun (Tsinghua University) |
| Abstract: | The premise of beggar-thy-neighbor policies and currency wars is that currency depreciations lead to export growth. This premise, however, is far from validated as the existing economic literature largely either fails to find significant trade flow effects of currency fluctuations or finds that these effects are only minor. We revisit the question of whether currency fluctuations are systematically associated with trade flows using rich and unique firm level Chinese customs data on China-US trade over the 2000 to 2011 period that allows us to consider firm involvement in processing trade and firm dynamics in both export and import markets. Our firm-level based estimation of trade elasticities suggest that the China-US trade balance strongly responds to changes in the CNY/USD rate. This finding is particularly pronounced when we distinguish between ordinary and processing firms. Our results thus suggest that the influence of exchange rates on trade flows is stronger than previously thought and add insights to the policy debate on beggar-thy-neighbor policies and currency wars by, at least in principle, validating the underlying premise of such policies. |
| JEL: | F14 F31 F41 |
| Date: | 2015–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:257&r=ifn |