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Jel Classification:F3 

Working Paper
The cyclicality of (bilateral) capital inflows and outflows

Recent research has shown that gross capital inflows and outflows are positively correlated and highly procyclical. This poses a puzzle since most theory predicts that capital inflows and outflows should be negatively correlated, and while capital inflows should be procyclical, capital outflows should be countercyclical. This previous work has examined the behavior of aggregate capital inflows and outflows (capital flows between a country and the rest of the world). This paper shows that bilateral capital inflows and outflows (flows between a pair of countries) are also positively correlated ...
Globalization Institute Working Papers , Paper 247

Working Paper
Does a Big Bazooka Matter? Central Bank Balance-Sheet Policies and Exchange Rates

We estimate the effects of quantitative easing (QE) measures by the ECB and the Federal Reserve on the US dollar-euro exchange rate at frequencies and horizons relevant for policymakers. To do so, we derive a theoretically-consistent local projection regression equation from the standard asset pricing formulation of exchange rate determination. We then proxy unobserved QE shocks by future changes in the relative size of central banks? balance sheets, which we instrument with QE announcements in two-stage least squares regressions in order to account for their endogeneity. We find that QE ...
Globalization Institute Working Papers , Paper 350

Report
Distribution margins, imported inputs, and the sensitivity of the CPI to exchange rates

Border prices of traded goods are highly sensitive to exchange rates; however, the consumer price index (CPI) and the retail prices of goods that make up the CPI are more stable. This paper decomposes the sources of this price stability for twenty-one OECD (Organisation for Economic Co-operation and Development) countries, focusing on the important role of distribution margins and imported inputs in transmitting exchange rate fluctuations into consumption prices. We provide rich cross-country and cross-industry details on distribution margins and their sensitivity to exchange rates, imported ...
Staff Reports , Paper 247

Working Paper
The Federal Reserve engages the world (1970-2000): an insider's narrative of the transition to managed floating and financial turbulence

This paper traces the evolution of the Federal Reserve and its engagement with the global economy over the last three decades of the 20th century: 1970 to 2000. The paper examines the Federal Reserve?s role in international economic and financial policy and analysis covering four areas: the emergence and taming of the great inflation, developments in US external accounts, foreign exchange analysis and activities, and external financial crises. It concludes that during this period the US central bank emerged to become the closest the world has to a global central bank.
Globalization Institute Working Papers , Paper 210

Working Paper
Differential Treatment in the Bond Market: Sovereign Risk and Mutual Fund Portfolios

How does sovereign risk affect investors' behavior? We answer this question using a novel database that combines sovereign default probabilities for 27 developed and emerging markets with monthly data on the portfolios of individual bond mutual funds. We first show that changes in yields do not fully compensate investors for additional sovereign risk, so that bond funds reduce their exposure to a country's assets when its sovereign default risk increases. However, the magnitude of the response varies widely across countries. Fund managers aggressively reduce their exposure to high-debt ...
International Finance Discussion Papers , Paper 1261

Working Paper
Managing Capital Flows in the Presence of External Risks

We introduce external risks, in the form of shocks to the level and volatility of world interest rates, into a small open economy model subject to the risk of sudden stops?large recessions together with abrupt reversals in capital inflows| and characterize optimal macroprudential policy in response to these shocks. In the model, collateral constraints create a pecuniary externality that leads to "overborrowing" and sudden stops that arise when the constraints bind. The typical sudden stop generated by the model replicates existing empirical evidence for emerging market economies: Low and ...
International Finance Discussion Papers , Paper 1213

Working Paper
International R&D Spillovers and Asset Prices

We study the international propagation of long-run risk in the context of a general equilibrium model with endogenous growth. Innovation and international diffusion of technologies are the channels at the core of our mechanism. A calibrated version of the model matches several asset pricing and macroeconomic quantity moments, alleviating some of the puzzles highlighted in the international macro-finance literature. Our model predicts that country-pairs that share more R&D have less volatile exchange rates and more correlated stock market returns. Using data from a sample of 19 developed ...
Working Papers , Paper 2015-41

Working Paper
Monetary Policy Divergence and Net Capital Flows: Accounting for Endogenous Policy Responses

This paper measures the effect of monetary tightening in key advanced economies on net capital flows around the world. Measuring this effect is complicated by the fact that the domestic monetary policies of affected economies respond endogenously to the foreign tightening shock. Using a structural VAR framework with quarterly panel data we estimate the impulse responses of domestic policy variables and net capital flows to a foreign monetary tightening shock. We find that the endogenous response of domestic monetary policy depends on each economy's capital account openness and exchange rate ...
Supervisory Research and Analysis Working Papers , Paper RPA 18-5

Working Paper
External and Public Debt Crises

The recent debt crises in Europe and the U.S. states feature similar sharp increases in spreads on government debt but also show important differences. In Europe, the crisis occurred at high government indebtedness levels and had spillovers to the private sector. In the United States, state government indebtedness was low, and the crisis had no spillovers to the private sector. We show theoretically and empirically that these different debt experiences result from the interplay between differences in the ability of governments to interfere in private external debt contracts and differences in ...
Working Paper Series , Paper WP-2015-5

Report
Pass-through of exchange rates to consumption prices: what has changed and why

In this paper, we use cross-country and time-series evidence to argue that retail price sensitivity to exchange rates may have increased over the past decade. This finding applies to traded goods as well as to non-traded goods. We highlight three reasons for the change in pass-through into the retail prices of goods. First, pass-through may have declined at the level of import prices, but the evidence is mixed over types of goods and countries. Second, there has been a large expansion of imported input use across sectors, meaning that the costs of imported goods as well as home-tradable goods ...
Staff Reports , Paper 261

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