Exchange rates

Jérôme Héricourt, Clément Nedoncelle, 11 June 2016

The idea that exchange rate volatility generates additional costs and uncertainty that are detrimental to international trade is widely accepted. This column argues that big, multi-destination firms – which account for the bulk of aggregate exports – reallocate exports across countries as a foreign exchange hedge. When bilateral volatility increases relative to multilateral volatility, exports towards the considered market are hampered, but exports remain mainly unchanged at the macro level.

Stefan Gerlach, Edoardo Di Giamberardino, 10 June 2016

The outcome of the UK’s referendum on EU membership could have a significant effect on sterling. This column estimates the potential size of this effect by looking at the relationship between daily changes in the sterling exchange rate and bookmakers’ odds of Brexit. Movements of between 5% and 15% seem plausible.

Barthélémy Bonadio, Andreas Fischer, Philip Sauré, 21 April 2016

According to standard estimates, exchange rate shocks affect import prices only slowly. This column presents evidence that challenges this view. Focusing on the large, unanticipated change in the Swiss franc in 2015, it shows that a change in import prices materialised very quickly. Prices started to move on the second working day after the exchange rate shock, and the medium-run pass-through of roughly 50% was reached after six additional working days.

Pasquale Della Corte, Steven Riddiough, Lucio Sarno, 29 February 2016

The world’s savings and investments are imbalanced. While some countries persistently borrow over time, others act like bankers to the world – lending year in and year out. This column argues that these imbalances matter for asset pricing in financial markets, and are key to understanding excess returns in currency markets.

Antoine Berthou, Filippo di Mauro, 24 December 2015

The effect of exchange rate devaluations on a country’s exports is frequently debated, with some supporting a strong impact and others suggesting no sizeable response of exports to relative price changes. This column argues that firm heterogeneity in terms of productivity and size can explain the opposing views. The measured reaction of aggregate exports to relative price movements is largely determined by the reaction of the most productive/largest companies.

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