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International Economics

Paper Session

Sunday, Jan. 7, 2018 10:15 AM - 12:15 PM

Pennsylvania Convention Center, 203-A
Hosted By: American Economic Association
  • Chair: Kimberly Berg, Miami University

Asymmetries and Non-linearities in Exchange Rate Pass-through

Mina Kim
,
U.S. Bureau of Labor Statistics
Logan T. Lewis
,
Federal Reserve Board
Robert Vigfusson
,
Federal Reserve Board

Abstract

How exchange rate changes pass-through into import prices is crucial for understanding both inflation at an aggregate level and the nature of firm competition and demand at a micro level. While the literature typically assumes exchange rate appreciations and depreciations pass through symmetrically, we show that dollar appreciations pass through more quickly and completely than dollar depreciations using product-level microdata of U.S. import prices collected by the BLS.
This asymmetry toward faster pass-through of dollar appreciations is more evident among differentiated goods closer to the consumer. Theoretically, this could reflect differences in pricing power, the shape of consumer demand, or the cost structure faced by firms. But it could also represent asymmetric price stickiness. We find that this is not the case. Indeed, we show that dollar appreciations are more likely to induce a price change than depreciations, despite the slower pass-through.
Sufficiently strong selective exit could also generate the observed asymmetry. Dollar depreciations are a negative shock for foreign exporters and could induce them to exit the U.S. market. The lack of a recorded price would bias pass-through towards zero. When focusing on those exits most likely to be endogenous, we find that dollar appreciations do not significantly raise the probability of exit compared to depreciations.
We outline a model of capacity constraints that is broadly consistent with our empirical findings. The model's key ingredients include: (1) Strategic complementarities that reduce pass-through in the short and long-run; (2) A capacity constraint that leads to temporarily lower pass-through for dollar (local) appreciations relative to depreciations; and (3) Sticky prices that further slow the price adjustment process, in combination with (1) and (2).

No Pain, No Gain. Multinational Banks in the Business Cycle

Raoul Minetti
,
Michigan State University
Qingqing Cao
,
Michigan State University
Maria Pia Olivero
,
Drexel University

Abstract

We study the role of multinational banks in the transmission of business cycle fluctuations. In our economy, multinational banks can transfer liquidity across borders through internal capital markets. However, their scarce knowledge of firms' domestic collateral hinders their allocation of liquidity to local firms. We characterize conditions under which multinational banks act as an amplifier or absorber of shocks. The results reveal that, through the interaction between liquidity and collateral effects, multinational banks can help dampen the impact of shocks in the short run but amplify business fluctuations in the medium and long run. We assess the quantitative implications of the model in light of evidence on multinational banks' lending patterns.

World Financial Flows and Asset Prices

Yan Bai
,
University of Rochester
Cristina Arellano
,
Federal Reserve Bank of Minneapolis
Patrick J. Kehoe
,
University of Minnesota

Abstract

A virtual explosion of research on theoretical models of sovereign default has occurred in the last decade. We begin by showing that the existing frameworks are not consistent with the recent empirical evidence shows that vast bulk of the movements in risk spreads on sovereign bonds are correlated across markets. Asset pricing models with preferences used in business cycle analysis cannot simultaneously explain the relatively small correlation in emerging countries' outputs and the large correlation of the spreads on sovereign bonds. We build a quantitative asset pricing model with relatively more exotic preferences that can account for these findings. We also account for the connection between monetary policy in developed economies and the volatile capital flows into emerging market economies.

Currency Regimes and the Carry Trade

Olivier Accominotti
,
London School of Economics
Jason Cen
,
University of Cambridge
David Chambers
,
University of Cambridge
Ian Marsh
,
City University London

Abstract

Carry trade returns vary across fixed and floating currency regimes. Over the last century, outsized carry returns occur exclusively in the floating regime, being zero in the fixed regime. The absence of skewness in floating carry returns rules out a skewness-based explanation for this result. Fixed-to-floating regime shifts deliver negative return shocks to the floating carry strategy, even when controlling for volatility risk. This result explains average excess returns to the floating and therefore the unconditional carry trades over the long-run. We rationalize these findings with a model allowing risk compensation in currency markets to depend on regime.
JEL Classifications
  • F3 - International Finance