There was no recession after Brexit. But a slowdown looks like it’s here now…
Figure 1: Log real GDP for France (blue), UK (bold red), Germany (green), US (bold blackteal), and euro area (tealbold black), all normalized to 2016Q2. Source: OECD, BEA, author’s calculations.
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Mr. Trump tweeted today:
Russia and China are playing the Currency Devaluation game as the U.S. keeps raising interest rates. Not acceptable!
— Donald J. Trump (@realDonaldTrump) April 16, 2018
Reader Bruce Hall, opining on the impact of mooted Chinese tariffs on US hog and soybean exports.
As with pork, it looks as if the cost of food is going down for Americans as the Chinese bury their citizens in food price increases.
In a previous post, I documented the fact that the Fama puzzle had transformed post-global financial crisis, so that for most currency pairs, interest rate differentials pointed in the right direction for subsequent exchange rate depreciation, from 2006 through end-2015 (Bussiere, Chinn, Ferrara, Heipertz (2018)). Here I show that the new puzzle persists through the end of 2017, a period when US interest rates were rising.
In my previous post, I recounted “The New Fama Puzzle” as it applied to dollar exchange rates, with focus on the euro/dollar rate. A quick observation: the reversal also appears for non-US dollar based exchange rates (against euro, yen, pound).
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Before 2007M08
and After 2007M09
If the joint hypothesis of uncovered interest rate parity (UIP) and rational expectations –- sometimes termed the unbiasedness hypothesis — held, then the slope of the regression lines (in red) would be indistinguishable from unity. In fact, they are significantly different from that value. This pattern of coefficient reversal holds up for other dollar-based exchange rates, as well as for other currency pairs (with a couple exceptions). The fact that the coefficient is positive in the post-global financial crisis period is what we term “the New Fama puzzle”.
So far, so-so.
We tell our students not to read too much into the strength or weakness of a currency. However, the dollar’s trajectory since November 2016 is quite striking.
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Taking place today, this is the fifth in the series, with topics this year on exchange rates and monetary policy, macroprudential policy, credit and business cycles (sponsored by UC Santa Cruz Economics, Santa Clara Economics, and Federal Reserve Bank of San Francisco, organization chaired by Helen Popper at SCU and Grace Weishi Gu at UCSC).
The website is here with links to papers, conference agenda here.
Not that I’m complaining. But seriously, it’s far past the “day one” of the new Administration when Donald Trump promised China would be declared a currency manipulator.