This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. ASSA Annual Meeting
  3. 2023
  4. Program
  5. Exchange Rates and Monetary Policy
« Back to Results

Exchange Rates and Monetary Policy

Paper Session

Friday, Jan. 6, 2023 10:15 AM - 12:15 PM (CST)

New Orleans Marriott, Iberville
Hosted By: Society for Economic Dynamics
  • Chair: Dmitry Mukhin, London School of Economics

The Macroeconomic Consequences of Exchange Rate Depreciations

Masao Fukui
,
Boston University
Emi Nakamura
,
University of California-Berkeley
Jon Steinsson
,
University of California-Berkeley

Abstract

We study the consequences of a "pure" exchange rate depreciation by comparing outcomes for peggers vs. floaters to the U.S. dollar in response to a dollar depreciation. We estimate that such depreciations are strongly expansionary for peggers: GDP, consumption, and investment rise substantially.  We interpret this evidence through the lens of a multi-country heterogeneous-agents New Keynesian model. We conclude that the expansion is driven by a strongly positive real income channel, while the expenditure switching channel is weak. 

Beyond Incomplete Spanning: Convenience Yields and Exchange Rate Disconnect

Zhengyang Jiang
,
Northwestern University
Arvind Krishnamurthy
,
Stanford University
Hanno Lustig
,
Stanford University
Jialu Sun
,
Stanford University

Abstract

We introduce safe asset demand for dollar-denominated bonds into a tractable incomplete-market model of exchange rates. The convenience yield on dollar bonds enters as a stochastic wedge in the Euler equations for exchange rate determination. This wedge reduces the pass-through from marginal utility shocks to exchange rate movements, resolving the exchange rate volatility puzzle. The wedge also exposes the dollar's exchange rate to convenience yield shocks, giving rise to exchange rate disconnect from macro fundamentals and a quantitatively important driver of currency risk premium. This endogenous exposure identifies a novel safe-asset-demand channel by which the Fed's QE impacts the dollar.

Safe Asset Competition and the Macroeconomy

Jason Choi
,
University of Wisconsin-Madison
Rishabh Kirpalani
,
University of Wisconsin-Madison
Diego Perez
,
New York University

Abstract

We study the implications of increasing competition in the market for global safe assets. Motivated by the recent increase in safe asset provision by private financial institutions and other governments, we model the interaction between governments and private agents for the provision of safe assets. We show that the effect of increased competition on the trajectory of US debt issuance is ambiguous. On the one hand, greater competition reduces market power in the provision of safe assets, which may increase US fiscal deficits. On the other hand, increased competition lowers the market share of the US, which may decrease US fiscal deficits. We also show that effects on the US and global economy depend on the source of this increased competition.

Optimal Exchange Rate Policy

Oleg Itskhoki
,
University of California-Los Angeles
Dmitry Mukhin
,
London School of Economics

Abstract

We develop a general policy analysis framework that features nominal rigidities and financial frictions with endogenous PPP and UIP deviations. The goal of the optimal policy is to balance output gap stabilization and international risk sharing using a mix of monetary policy and FX interventions. The nominal exchange rate plays a dual role. First, it allows for the real exchange rate adjustments when prices are sticky, which are necessary to close the output gap. Monetary policy can eliminate the output gap, but this generally requires a volatile nominal exchange rate. Volatility in the nominal exchange rate, in turn, limits the extent of international risk sharing in the financial market with risk averse intermediaries. Optimal monetary policy closes the output gap, while optimal FX interventions eliminate UIP deviations. When the first-best real exchange rate is stable, both goals can be achieved by a fixed exchange rate policy --- an open-economy divine coincidence. Generally, this is not the case, and the optimal policy requires a managed peg by means of a combination of monetary policy and FX interventions, without requiring the use of capital controls. We explore various constrained optimal policies, when either monetary policy or FX interventions are restricted, and characterize the possibility of central bank's income gains and losses from FX interventions.
JEL Classifications
  • E3 - Prices, Business Fluctuations, and Cycles
  • F3 - International Finance