One reason why inflation exceeded my estimates from earlier this year is the price of imports. Since 2020M02, goods import prices from China have risen 5.3%, after declining 5.8% over the preceding six years. The dollar depreciated by 9.4% over the same period, implying a exchange rate pass-through coefficient of 0.56.
Category Archives: exchange rates
Do Exchange Rate Movements Equalize Yields?
Fama (JME, 1984), and Tryon (1979) demonstrated that changes in the exchange rate do not equal the forward premium, in what came to be known as the forward premium puzzle. Since the forward premium equals the interest differential in the absence of current and incipient capital controls and in the absence of default risk — this finding is equivalent to the result that interest rates, after accounting for exchange rate changes, are not equalized on average.
In other words, if the yield on the US default-risk-free bond is 2% and the yield on a UK default-risk-free bond is 5%, then the US dollar does not on average appreciate by 3% against the pound in order to equalize returns. This finding could be explained, for instance, by the presence of a time-varying exchange risk premium on pound sterling assets (vs. dollar assets); however, it’s not been easy to find robust evidence of determinants of such a time varying premium.
While this puzzle has largely persisted in the ensuing 25 years, it seemingly disappeared during and after the global financial crisis — until re-appearing in recent years.
“Do Central Banks Rebalance Their Currency Shares?”
Some do; some don’t. Now published, an article in Journal of International Money and Finance (updated) by me, Hiro Ito, and Robert McCauley answering this question. From the abstract:
A New Database on Individual Central Bank Reserve Composition
Hiro Ito and Robert McCauley have compiled a new dataset of the currency composition of international reserves over the 1999-2020 period.
“Do Central Banks Rebalance Their Currency Shares?”
Some do; some don’t. Revised paper by me, Hiro Ito, and Robert McCauley. From the abstract:
Review of Subacchi, “The People’s Money: How China Is Building a Global Currency”
For those interested in the RMB, here’s my book review:
Everything Is Relative
From CNN Business, Dollar doldrums are back as inflation worries heat up:
Steel Tariffs and Iron/Steel Prices
The Section 232 tariffs on steel and aluminum were a bad idea during the Trump administration. They’re still a bad idea.
Guest Contribution: “What Three Economists Taught Us About Currency Arrangements”
Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version appeared at Project Syndicate.
Macroeconomic Competitiveness
Competitiveness is often appealed to in popular discourse, but seldom defined. In macroeconomics, competitiveness is usually interpreted as cost competitiveness. Chinn and Johnston (JPAM, 1994) discuss the topic at length. Here is the OECD’s measure of cost competitiveness since 1999, along with the Fed’s CPI deflated measure of the dollar against a broad basket of currencies.