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on International Finance |
| By: | Hanno Lustig; Adrien Verdelhan |
| Abstract: | Compared to the predictions of exchange rate models with complete spanning in financial markets, actual exchange rates are puzzlingly smooth and only weakly correlated with macro-economic fundamentals. This paper derives an upper bound on the effects of incomplete spanning in international financial markets. We introduce stochastic wedges between the exchange rate's rate of appreciation and the difference between the marginal utility growth rates of the countries' stand-in investors without violating the foreign investors' Euler equations for the domestic risk-free assets. The wedges always lower the volatility of no-arbitrage exchange rates and can help to match the volatility of exchange rates in the data, provided that the wedges are as volatile as the maximum Sharpe ratio, but the wedges cannot deliver exchange rates that are uncorrelated with macro-fundamentals without largely eliminating currency risk premia. |
| JEL: | F31 G12 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22023&r=ifn |
| By: | Roberto Chang; Andrés Velasco |
| Abstract: | We analyze conventional and unconventional monetary policies in a dynamic small open-economy model with financial frictions. In the model, financial intermediaries or banks borrow from the world market and lend to domestic households. Banks can borrow abroad up to a multiple of their equity; in turn, there is a limit to how much bank equity households can hold. An economy-wide credit constraint and an endogenous interest rate spread emerge from this combination of external and domestic frictions. The resulting financial imperfections amplify the domestic effects of exogenous shocks and make those effects more persistent. In response to external balance shocks, fixed exchange rates are contractionary and flexible exchange rates expansionary (although less so in the presence of currency mismatches); the opposite is true in response to increases in the world interest rate. Unconventional policies, including central bank direct credit, discount lending, and equity injections to banks, have real effects only if financial constraints bind. Because of bank leverage, central bank discount lending and equity injections are more effective than direct credit. Sterilized foreign exchange intervention is equivalent to lending directly to domestic agents. Unconventional policies are feasible only to the extent that the central bank holds a sufficient amount of international reserves. |
| JEL: | E52 E58 F41 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21955&r=ifn |
| By: | Julian di Giovanni; Andrei A. Levchenko; Isabelle Mejean |
| Abstract: | This paper investigates the role of individual firms in international business cycle comovement using data covering the universe of French firm-level value added, bilateral imports and exports, and cross-border ownership over the period 1993-2007. At the micro level, controlling for firm and country effects, trade in goods with a particular foreign country is associated with a significantly higher correlation between a firm and that foreign country. In addition, foreign multinational affiliates operating in France are significantly more correlated with the source economy. The impact of direct trade and multinational linkages on comovement at the micro level has significant macro implications. Because internationally connected firms are systematically larger than non- internationally connected firms, the firms directly linked to foreign countries represent only 8% of all firms, but 56% of all value added, and account for 75% of the observed aggregate comovement. Without those linkages the correlation between France and foreign countries would fall by about 0.091, or one-third of the observed average business cycle correlation of 0.29 in our sample of partner countries. These results are evidence of transmission of business cycle shocks through direct trade and multinational ownership linkages at the firm level. |
| JEL: | F44 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21885&r=ifn |