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on Open Economy Macroeconomics |
| By: | Nicolas Groshenny; Naveed Javed |
| Abstract: | We highlight the importance of jointly identifying domestic and foreign monetary shocks in SVAR-based evaluations of Dornbusch exchange rate overshooting and uncovered interest parity (UIP) in small open economies (SOEs). We estimate SVAR models for six developed SOEs to understand the effects of SOE and US monetary policy shocks on bilateral SOE/US exchange rates. Our novel identification strategy features block exogeneity combined with sign restrictions imposed on the coefficients of the SOE and US monetary policy rules. Crucially, the response of the exchange rate to monetary shocks is not restricted, and the SOE policy rate and the exchange rate are allowed to interact instantaneously. Exchange rate dynamics triggered by monetary shocks are found to be broadly in line with Dornbusch overshooting and UIP. We demonstrate that the few cases in which US monetary shocks trigger delayed overshooting in specific samples may not be inconsistent with UIP, but rather an artifact of SOE endogenous monetary policy responses to the US policy rate. |
| Keywords: | structural vector autoregressions, small open economies, monetary policy shocks, exchange rates, delayed overshooting, uncovered interest rate parity, spillovers of US monetary policy |
| JEL: | C32 E52 F31 F41 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-06 |
| By: | Pietro Patelli; Jimmy Shek; Ilhyock Shim |
| Abstract: | Currency appreciation in emerging market economies (EMEs) has gone hand in hand with greater risk-taking, higher capital flows and more accommodative financial conditions, against the backdrop of the increasing share of foreign investment in local currency assets in EMEs' external financing since 2007. The historically positive correlation between US dollar strength against EME currencies and EME sovereign bond spreads over US Treasuries up to 2021 continued in Latin America but reversed in emerging Asia in 2022–23. Such a divergence reflects a range of policy responses by EME central banks in the face of the unprecedented combination of shocks in 2022. In particular, central banks in emerging Asia intervened more actively in FX markets and relied less on monetary policy tightening than those in Latin America. |
| Date: | 2023–11–02 |
| URL: | https://d.repec.org/n?u=RePEc:bis:bisblt:79 |
| By: | Liza Fahmida |
| Abstract: | Bangladesh has experienced two distinct exchange rate regimes: a fixed exchange rate system from January 1972 to May 2003 and a floating one since June 2003. After adopting the floating exchange rate regime, Bangladesh positively impacted macroeconomic development. The key macroeconomic variables considered include foreign reserves, worker's remittances, and export proceeds. However, ongoing challenges for the country include the depreciating trend of the local currency within a highly inflationary economy. This paper aims to evaluate macroeconomic performance across the two regimes and analyze the current currency situation in Bangladesh. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.09593 |
| By: | Lucas Ordóñez (Universidad de Buenos Aires - IIEP) |
| Abstract: | This article investigate show domestic and external supply shocks influence inflation in Argentina using the Local Projections methodology. I categorise supply shocks into two groups: domestic and external. Domestic supply shocks include the nominal exchange rate and regulated prices. In contrast, external supply shocks include international energy and food prices. The results reveal two main findings. First, both domestic and external supply shocks positively influence inflation. Second, there are significant variations in the magnitude and dynamic of how these supply shocks are transmitted to inflation. These findings provide new evidence on how supply shocks influence inflationary dynamics in developing countries and small open economies. |
| Keywords: | Local Projections, Supply shocks, Inflation, Exchange rate pass-through. |
| JEL: | C22 E31 F41 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:351 |
| By: | Martin Brown (Swiss National Bank - Study Center Gerzensee; University of St. Gallen); Daniel Hoechle (FHNW School of Business - Institute for Finance; University of Basel - Department of Finance); Alejandra Perez; Markus Schmid (University of St. Gallen - Swiss Institute of Banking and Finance; University of St. Gallen - School of Finance; Swiss Finance Institute; European Corporate Governance Institute (ECGI)) |
| Abstract: | We study the impact of monetary policy on household finance in open economies. We examine the response of retail investors to a policy shock which led to (i) a sharp appreciation of the domestic currency, (ii) a significant increase in exchange rate volatility, and (iii) the introduction of a negative policy rate. Our analysis is based on monthly, account-level data covering bank deposits, securities holdings and trades for a large sample of affluent bank clients. The policy shock leads to a shift of assets away from fixed income securities towards domestic currency bank deposits and foreign currency risky securities. Wealthier clients display a stronger portfolio shift towards risky securities in foreign currency as they search for yield. Investor attention, as measured by trading activity and contacts with bank advisors, increases temporarily after the shock. |
| Keywords: | Household finance, Monetary policy, Financial stability, Exchange rates, Interest rates |
| JEL: | E41 E52 E58 F31 G11 G21 G51 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp24108 |