nep-ifn New Economics Papers
on International Finance
Issue of 2019‒03‒25
two papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Microstructure of Foreign Exchange Markets By Martin D. D. Evans; Dagfinn Rime
  2. The effects of conventional and unconventional monetary policy on exchange rates By Atsushi Inoue; Barbara Rossi

  1. By: Martin D. D. Evans (Department of Economics, Georgetown University); Dagfinn Rime (Department of Finance, BI Norwegian Business School, Oslo)
    Abstract: This article presents an overview of research on the Microstructure of Foreign Ex-change Markets. We begin by summarizing the institutional features of FX trading and describe how they have evolved since the 1980s. We then explain how these features are represented in microstructure models of FX trading. Next, we describe the links be- tween microstructure and traditional macro exchange-rate models and summarize how these links have been explored in recent empirical research. Finally, we provide a microstructure perspective on two recent areas of interest in exchange-rate economics: the behavior of returns on currency portfolios, and questions of competition and regulation.
    Keywords: Exchange-Rate Dynamics, Microstructure, Order Flows, Liquidity, Electronic trading
    JEL: F3 F4 G1
    Date: 2019–03–01
  2. By: Atsushi Inoue; Barbara Rossi
    Abstract: What are the effects of monetary policy on exchange rates? And have unconventional monetary policies changed the way monetary policy is transmitted to international financial markets? According to conventional wisdom, expansionary monetary policy shocks in a country lead to that country's currency depreciation. We revisit the conventional wisdom during both conventional and unconventional monetary policy shocks as changes int he whole yield curve due to unanticipated monetary policy moves and allows monetary policy shocks to differ depending on how they affect agents' expectations about the future path of interest rates as well as their perceived effects on the riskiness/uncertainty in the economy. Our empirical results show that: (i) a monetary policy easing leads to a depreciation of the country's spot nominal exchange rate in both conventional and unconventional periods; (ii) however, there is substancial heterogeneity in monetary policy shocks over time and their effects depend on the way they affect agents'expectations; (iii) we find favorable evidence to Dornbusch's (1976) overshooting hypothesis; (iv) changes in expected real interest rates play an important role in the transmission of monetary policy shocks.
    Keywords: Exchange rates, Zero-lower bound, unconventional monetary policy, forward guidance.
    JEL: F31 F37 C22 C53
    Date: 2018–12

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