Job Market Paper
Foreign Currency Exposure and the Financial Channel of Exchange Rates
Abstract: Exchange rate movements affect the economy though changes in net exports, i.e. the trade channel, and through valuation changes in assets and liabilities denominated in foreign currencies, i.e. the financial channel. In this paper, I investigate the effects of U.S. dollar (USD) exchange rate fluctuations in small open economies, and assess the relative strength of the financial and trade channels. To identify an exogenous USD exchange rate movements in small open economies, I construct an external instrument based on the uncovered interest rate parity condition for the USD exchange rate against major currencies. I find that an appreciation of the domestic currency against the USD has expansionary effects on the macroeconomy and loosens financial conditions, which is consistent with the financial channel of exchange rates. Moreover, to have a structural interpretation of my empirical findings, I estimate a small open economy New Keynesian model, in which a fraction of the domestic banks’ liabilities is denominated in USD. The model estimates reveal that an appreciation against the USD can be expansionary depending on the strength of the financial channel, which is linked to the level of foreign currency exposure. Finally, the model suggests that the presence of a strong financial channel can potentially create a trade-off for central banks between stabilizing inflation and GDP, and it can increase spillovers from foreign shocks.
Publications and Working Papers
Spillovers of U.S. Unconventional Monetary Policy to Emerging Market Economies: The Role of Capital Flows (with Michael Hachula and Christian Offermanns)
Journal of International Money and Finance, Volume 73, 2017
Abstract: We employ a structural global VAR model to analyze whether U.S. unconventional monetary policy shocks, identified through changes in the central bank’s balance sheet, have an impact on financial and economic conditions in emerging market economies (EMEs). Moreover, we study whether international capital flows are an important channel of shock transmission. We find that an expansionary policy shock significantly increases portfolio flows from the U.S. to EMEs for almost two quarters, accompanied by a persistent movement in real and financial variables in recipient countries. Moreover, EMEs on average respond to the shock with an easing of their own monetary policy stance. The findings appear to be independent of heterogeneous country characteristics like the underlying exchange rate arrangement, the quality of institutions, or the degree of financial openness.
What really drives public debt: a hollistic approach (with Alex Pienkowski)
IMF Working Paper No. 137, Volume 15, 2015
Abstract: This paper presents a novel approach to details the propagation of shocks to public debt. The modeling technique involves a structural vector auto-regression (SVAR) with an endogenous debt accumulation equation. It explores how the main drivers of sovereign debt dynamics – the primary balance, the interest rate, growth and inflation – interact with each other. Such analysis is particularly useful for debt sustainability analysis. We find that some interactions exacerbate the impact of shocks to the accumulation of debt, while other act to stabilize debt dynamics. Furthermore, the choice of monetary policy regime plays an important role in these dynamics – countries with constrained monetary policy are more at risk from changes in market sentiment and must rely much more on fiscal policy to restrain debt.