Covered interest parity deviations: Macrofinancial determinants

Cerutti, Eugenio; Obstfeld, Maurice; Zhou, Haonan

doi:10.1016/j.jinteco.2021.103447

Cited by 35 publications

(51 citation statements)

References 59 publications

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“…Our results support an emerging narrative that the US dollar's role as an international and safehaven currency has surged since the global financial crisis (Bruno and Shin (2015); Jiang et al (2019); Kekre and Lenel (2020); Cerutti et al (2019)).…”

supporting

confidence: 79%

Exchange Rate Reconnect

Lilley¹,

Maggiori

Neiman

et al. 2022

The Review of Economics and Statistics

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It is surprisingly difficult to find economic variables that strongly co-move with exchange rates, a phenomenon codified in a large literature on “exchange rate disconnect.” We demonstrate that a variety of common proxies for global risk appetite, which did not co-move with exchange rates prior to 2007, have provided significant in-sample explanatory power for currencies since then. Furthermore, during 2007-2012, U.S. purchases of foreign bonds were highly correlated with these risk measures and with exchange rates. Our results support the narrative that the US dollar's role as an international and safe-haven currency has surged since the global financial crisis.

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supporting

confidence: 79%

Exchange Rate Reconnect

Lilley¹,

Maggiori

Neiman

et al. 2022

The Review of Economics and Statistics

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“…Historically, complaints about the dollar's 'exorbitant privilege' have focused on the financial benefits accruing to the United States. However, empirical studies of interestrate differentials between the U.S. and other countries attribute only a small effect to the dollar's safe-haven status (see Cerutti, Obstfeld, and Zhou 2019). And any reduction in U.S. debt servicing costs attributable to the captive demand for dollar reserves is negligible in a period when interest rates on treasury bills and bonds, not just those issued by the U.S. but also those issued by other countries whose currencies lack a claim to significant exorbitant privilege, are close to zero.…”

Section: Future Prospectsmentioning

confidence: 99%

Bretton Woods After 50

Eichengreen

2021

Review of Political Economy

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This paper reviews the operation of the Bretton Woods international monetary system 50 years after the United States closed the Gold Window linking the dollar to gold in August 1971. It argues that Bretton Woods operated as successfully as it did owing to three special circumstances: low international capital mobility, tight financial regulation, and the dominant economic and financial position of the United States and the dollar. There can be no more straightforward an explanation for why nothing like Bretton Woods will be restored in the foreseeable future.

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“…12 For evidence on deviations from CIP in both Advanced and Emerging Economies, see e.g. Borio, McCauley and McGuire, 2016;Cerutti, Obstfeld and Zhou, 2019;Du and Schreger, 2016;Du, Tepper and Verdelhan, 2018. associated with significant CIP-deviations and with a reduction in USD-denominated cross-border banking flows. We show that CIP-deviations can hamper the transmission of local policy rate hikes to domestic credit and that CC are eventually useful to enhance such transmission.…”

Section: Preview Of the Papermentioning

confidence: 99%

Capital Controls, Domestic Macroprudential Policy and the Bank Lending Channel of Monetary Policy

Fabiani¹,

López²,

Peydró³

et al. 2021

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We study how capital controls and domestic macroprudential policy tame credit supply booms, respectively targeting foreign and domestic bank debt. For identification, we exploit the simultaneous introduction of capital controls on foreign exchange (FX) debt inflows and an increase of reserve requirements on domestic bank deposits in Colombia during a strong credit boom, as well as credit registry and bank balance sheet data. Our results suggest that first, an increase in the local monetary policy rate, raising the interest rate spread with the United States, allows more FX-indebted banks to carry trade cheap FX funds with more expensive peso lending, especially toward riskier, opaque firms. Capital controls tax FX debt and break the carry trade. Second, the increase in reserve requirements on domestic deposits directly reduces credit supply, and more so for riskier, opaque firms, rather than enhances the transmission of monetary rates on credit supply. Importantly, different banks finance credit in the boom with either domestic or foreign (FX) financing. Hence, capital controls and domestic macroprudential policy complementarily mitigate the boom and the associated risk-taking through two distinct channels

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Covered interest parity deviations: Macrofinancial determinants

Cited by 35 publications

References 59 publications

Exchange Rate Reconnect

Exchange Rate Reconnect

Bretton Woods After 50

Capital Controls, Domestic Macroprudential Policy and the Bank Lending Channel of Monetary Policy

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