nep-ifn New Economics Papers
on International Finance
Issue of 2021‒05‒03
two papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Exchange Rates and Insulation in Emerging Markets By Eichengreen, Barry; Park, Donghyun; Ramayandi, Arief; Shin, Kwanho
  2. The Dynamic Impact of FX Interventions on Financial Markets By Menkhoff, Lukas; Rieth, Malte; Stöhr, Tobias

  1. By: Eichengreen, Barry (University of California, Berkeley); Park, Donghyun (Asian Development Bank); Ramayandi, Arief (Asian Development Bank); Shin, Kwanho (Korea University)
    Abstract: The insulating properties of flexible exchange rates have long been a highly contentious issue in emerging markets—not least in Asian emerging markets. A number of recent theoretical and empirical studies question whether a trade-off exists between rigid exchange rate regimes and insulation from foreign shocks when the degree of international capital mobility is high. On the other hand, Obstfeld, Ostry, and Qureshi (2017) find that countries with flexible exchange rate regimes experience less real and financial instability in the face of global financial volatility. We contribute to this empirical debate by significantly extending their analysis. Overall, our findings are broadly consistent with their results, suggesting that flexible exchange rate regimes are better at insulating emerging markets from external shocks. There are, however, a few subtle differences. In particular, we find somewhat less robust evidence that limited flexibility is enough to insulate emerging markets from shocks.
    Keywords: exchange rate; exchange rate regime; fixed; flexible; insulate; intermediate; shock
    JEL: F31
    Date: 2020–02–26
  2. By: Menkhoff, Lukas (HU Berlin and DIW Berlin); Rieth, Malte (DIW Berlin); Stöhr, Tobias (Kiel Institute for the World Economy)
    Abstract: Evidence on the effectiveness of FX interventions is either limited to short horizons or hampered by debatable identification. We address these limitations by identifying a structural vector autoregressive model for the daily frequency with an external instrument. Applying this approach to the most important, freely floating currencies, we find that FX intervention shocks significantly affect exchange rates and that this impact persists for months. We show for Japan and the US that interest rates tend to fall in response to sales of the domestic currency, whereas stock prices of large (exporting) firms increase after devaluation of the domestic currency.
    Keywords: foreign exchange intervention; structural VAR; exchange rates; interest rates; stock prices;
    JEL: F31 F33 E58
    Date: 2019–12–04

This nep-ifn issue is ©2021 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.