Exchange rates

Lukas Menkhoff, Lucio Sarno, Maik Schmeling, Andreas Schrimpf, 30 June 2016

Determining ‘currency value’ is a century-old topic on which there is little consensus among economists. This column proposes a novel way of adjusting real exchange rates for key country-specific fundamentals to obtain better gauges of currency valuation levels. Adjusting for productivity, export quality, foreign assets, and output gaps is shown to isolate information related to currency risk premia across countries. This can serve as a more precise input into investment and policy decisions.

Filippo di Mauro, Konstantins Benkovskis, Sante De Pinto, Marco Grazioli, 29 June 2016

In the ‘currency wars’ discussion, it is almost taken for granted that exchange rate depreciations will result in non-trivial export gains.  Using evidence from countries in Europe and Asia, this column argues instead that factors unrelated to prices/exchange rates often play a predominant role in shaping trade developments. Moreover, these factors affect export outcomes in a very diversified manner across countries, in part because of the interplay of global value chains.

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.

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