nep-ifn New Economics Papers
on International Finance
Issue of 2019‒10‒21
four papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Export Prices, Markups, and Currency Choice after a Large Appreciation By Daniel Kaufmann; Tobias Renkin
  2. US Monetary Policy and International Risk Spillovers By Kalemli-Ozcan, Sebnem
  3. Foreign exchange dealer asset pricing By Reitz, Stefan; Umlandt, Dennis
  4. Cryptocurrencies, Currency Competition, and The Impossible Trinity By Benigno, Pierpaolo; Schilling, Linda Marlene; Uhlig, Harald

  1. By: Daniel Kaufmann; Tobias Renkin
    Abstract: We analyze export price adjustment of Swiss manufacturing firms using a novel data set of matched export, import, and domestic prices. After a large, unexpected, and permanent appreciation of the Swiss franc, export prices set in domestic currency fell less than export prices set in foreign currency. This difference prevails if we control for variation in firms' marginal cost. Through the lens of a structural model, this difference can be traced back to strategic complementarity in price setting for firms pricing in foreign currency. Meanwhile, firms setting prices in domestic currency exhibit no strategic complementarity and follow a constant markup-pricing rule.
    Keywords: Nominal exchange rate, border prices, currency choice, variable markups, pricing-to-market, price rigidity, exchange rate pass through, exchange rate sensitive factor costs.
    JEL: E3 E5 F3 F4
    Date: 2019–10
  2. By: Kalemli-Ozcan, Sebnem
    Abstract: I show that monetary policy divergence vis-a-vis the U.S. has larger spillover effects in emerging markets than advanced economies. The monetary policy of the U.S. affects domestic credit costs in other countries through its effect on global investors' risk perceptions. Capital flows in and out of emerging market economies are particularly sensitive to fluctuations in such risk perceptions and have a direct effect on local credit spreads. Domestic monetary policy is ineffective in mitigating this effect as the pass-through of policy rate changes into short-term interest rates is imperfect. This disconnect between short rates and monetary policy rates is explained by changes in risk perceptions. A key policy implication of my findings is that emerging markets' monetary policy actions designed to limit exchange rate volatility can be counterproductive.
    Date: 2019–10
  3. By: Reitz, Stefan; Umlandt, Dennis
    Abstract: We show that excess returns to the carry trade can be interpreted as compensation for foreign exchange dealers' capital risk. Given that the top market makers in foreign exchange are at the heart of the market's information aggregation process we also suggest that it is their marginal value of wealth which prices foreign currencies. Consistent with this hypothesis the empirical results show that shocks to the equity capital ratios of the top three foreign exchange dealers have explanatory power for the cross-sectional variation in expected currency market returns, while those of the average dealer provide no substantial additional information.
    Keywords: Carry Trades,FX Dealers,Currency Risk,Intermediary Asset Pricing
    JEL: F31 G12 G15
    Date: 2019
  4. By: Benigno, Pierpaolo; Schilling, Linda Marlene; Uhlig, Harald
    Abstract: We analyze a two-country economy with complete markets, featuring two national currencies as well as a global (crypto)currency. If the global currency is used in both countries, the national nominal interest rates must be equal and the exchange rate between the national currencies is a risk- adjusted martingale. We call this result Crypto-Enforced Monetary Policy Synchronization (CEMPS). Deviating from interest equality risks approaching the zero lower bound or the abandonment of the national currency. If the global currency is backed by interest-bearing assets, additional and tight restrictions on monetary policy arise. Thus, the classic Impossible Trinity becomes even less reconcilable.
    Keywords: cryptocurrency; currency competition; Exchange Rates; impossible trinity; independent monetary policy; uncovered interest parity
    JEL: D53 E4 F31 G12
    Date: 2019–08

This nep-ifn issue is ©2019 by Vimal Balasubramaniam. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.