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Report
The emerging market economies in times of taper-talk and actual tapering
Diez, Federico J. (2014-11-14)
The emerging market economies (EME) experienced financial distress during two recent periods, both linked to the prospect of the Federal Reserve starting to slow its asset purchases. This policy change was expected to reverse the capital flows directed to the EME. Despite this aggregate effect, a closer analysis shows that there were significant differences across the EME during the time when talk of the upcoming taper began and the period when the policy was implemented. The author makes use of the literature on currency crises to analyze the different cross-country responses and to identify ...
Current Policy Perspectives , Paper 14-6

Report
Uncovering covered interest parity: the role of bank regulation and monetary policy
Puria, Kovid; Bräuning, Falk (2017-06-01)
We analyze the factors underlying the recent deviations from covered interest parity. We show that these deviations can be explained by tighter post-crisis bank capital regulations that made the provision of foreign exchange swaps more costly. Moreover, the recent monetary policy and related interest rate divergence between the United States and other major foreign countries has led to a surge in demand for swapping low interest rate currencies into the U.S. dollar. Given the higher bank balance sheet costs resulting from these regulatory changes, the increased demand for U.S. dollars in the ...
Current Policy Perspectives , Paper 17-3

Report
The effects of a stronger dollar on U.S. prices
Diez, Federico J.; Gopinath, Gita (2015-12-01)
Since 2014:Q3, the U.S. dollar has experienced the third-fastest appreciation in over 30 years, with its nominal exchange and real exchange rate rising 15 percent against almost all foreign currencies (as measured by the Major Currencies Dollar Index). This sudden and rapid gain has engendered concerns about how a stronger dollar will affect U.S. export and import prices and ultimately, consumer prices and inflation in the United States. This paper assembles a rich database, spanning the period from 1985:Q1 through 2014:Q4, that combines several measures of prices and exchange rates in order ...
Current Policy Perspectives , Paper 15-9

Briefing
Domestic and foreign announcements on unconventional monetary policy and exchange rates
Diez, Federico J.; Presno, Ignacio (2013)
This brief studies the effects that announcements about unconventional monetary policies (large-scale asset purchases, refinancing operations, and forward guidance) have on nominal exchange rates. To this end, the authors use high-frequency intra-daily data and look at the variations in government future yields and in nominal exchange rates over a narrow window around the time of the announcements. They find that expansionary monetary policy shocks embedded in announcements made by the Federal Reserve depreciate the U. S. dollar. In contrast, the authors also find that similar unexpected ...
Public Policy Brief

Working Paper
International Financial Spillovers to Emerging Market Economies: How Important Are Economic Fundamentals?
Ahmed, Shaghil; Coulibaly, Brahima; Zlate, Andrei (2017-06-05)
We assess the importance of economic fundamentals in the transmission of international shocks to financial markets in various emerging market economies (EMEs), covering the so-called taper-tantrum episode of 2013 and seven other episodes of severe EME-wide financial stress since the mid-1990s. Cross-country regressions lead us to the following results: (1) EMEs with relatively better economic fundamentals suffered less deterioration in financial markets during the 2013 taper-tantrum episode. (2) Differentiation among EMEs set in relatively early and persisted through this episode. (3) During ...
Supervisory Research and Analysis Working Papers , Paper RPA 17-2

Working Paper
Optimal Monetary Policy in an Open Emerging Market Economy
Iyer, Tara (2016-06-20)
The majority of households across emerging market economies are excluded from the financial markets and cannot smooth consumption. I analyze the implications of this for optimal monetary policy and the corresponding choice of domestic versus external nominal anchor in a small open economy framework with nominal rigidities, aggregate uncertainty and financial exclusion. I find that, if set optimally, monetary policy smooths the consumption of financially excluded agents by stabilizing their income. Even though Consumer Price Index (CPI) inflation targeting approximates optimal monetary policy ...
Working Paper Series , Paper WP-2016-6

Working Paper
Unconventional monetary policy and the dollar: conventional signs, unconventional magnitudes
Glick, Reuven; Leduc, Sylvain (2015-11-29)
We examine the effects of unconventional monetary policy surprises on the value of the dollar using high-frequency intraday data and contrast them with the effects of conventional policy tools. Identifying monetary policy surprises from changes in interest rate future prices in narrow windows around policy announcements, we find that monetary policy surprises since the Federal Reserve lowered its policy rate to the effective lower bound have had larger effects on the value of the dollar. In particular, we document that the impact on the dollar has been roughly three times that following ...
Working Paper Series , Paper 2015-18

Working Paper
“Conditional PPP” and Real Exchange Rate Convergence in the Euro Area
Glick, Reuven; Wu, Jyh-Lin; Bergin, Paul R. (2016-10-18)
While economic theory highlights the usefulness of flexible exchange rates in promoting adjustment in international relative prices, flexible exchange rates also can be a source of destabilizing shocks. We find that when countries joining the euro currency union abandoned their national exchange rates, the adjustment of real exchange rates toward their long-run equilibrium surprisingly became faster. To investigate, we distinguish between differing rates of purchasing power parity (PPP) convergence conditional on alternative shocks, which we refer to as ?conditional PPP.? We find that the ...
Working Paper Series , Paper 2016-29

Working Paper
Optimal Monetary Policy and Capital Account Restrictions in a Small Open Economy
Liu, Zheng; Spiegel, Mark M. (2013)
The recent financial crisis has led to large declines in world interest rates and surges of capital flows to emerging market economies. We examine the effectiveness and welfare implications of capital control policies in the face of such external shocks in a monetary DSGE model of a small open economy. We consider both optimal, time-varying restrictions on capital inflows and a simple capital account restriction, such as a constant tax on foreign debt holdings. We then compare the effectiveness of such capital account restrictions under alternative monetary regimes. We find that the optimal ...
Working Paper Series , Paper 2013-33

Working Paper
Uncertainty and Hyperinflation: European Inflation Dynamics after World War I
Lopez, Jose A.; Mitchener, Kris James (2018-05-09)
Fiscal deficits, elevated debt-to-GDP ratios, and high inflation rates suggest hyperinflation could have potentially emerged in many European countries after World War I. We demonstrate that economic policy uncertainty was instrumental in pushing a subset of European countries into hyperinflation shortly after the end of the war. Germany, Austria, Poland, and Hungary (GAPH) suffered from frequent uncertainty shocks ? and correspondingly high levels of uncertainty ? caused by protracted political negotiations over reparations payments, the apportionment of the Austro-Hungarian debt, and border ...
Working Paper Series , Paper 2018-6

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