The global financial cycle and capital flows during the COVID-19 pandemic

We estimate the heterogeneous effect of the global financial cycle on exchange rates and cross-border capital flows during the COVID-19 pandemic, using weekly exchange rate and portfolio flow data for a panel of 59 advanced and emerging market economies. We estimate a global financial cycle (GFC) index at the weekly frequency with data through the end of 2021. We then estimate the country-specific sensitivities of exchange rates and capital flows to fluctuations in the GFC. The ability of the GFC to explain fluctuations in exchange rates and capital flows increased dramatically during the pandemic. There is significant cross-country heterogeneity in the response of exchange rates or capital flows to fluctuations in the GFC. During the pandemic, high-frequency indicators like weekly changes in Covid cases and vaccination rates were just as important as standard macroeconomic fundamentals like the current account, reserves, and net foreign assets in explaining this heterogeneity.

Exchange rates and multicommodity international trade: insights from spatial price equilibrium modeling with policy instruments via variational inequalities

In this paper, we construct a multicommodity international trade spatial price equilibrium model of special relevance to agriculture in which exchange rates are included along with policy instruments in the form of tariffs, subsidies as well as quotas. The model allows for multiple trade routes between country origin nodes and country destination nodes and these trade routes can include different modes of transportation and transport through distinct countries. We capture the impacts of exchange rates through the definition of effective path costs and identify the governing multicommodity international trade spatial price equilibrium conditions, which are then formulated as a variational inequality problem in product path flows. Existence results are established and a computational procedure presented. The illustrative numerical examples and a case study are inspired by the impacts of the war against Ukraine on agricultural trade flows and product prices. The modeling and algorithmic framework allows for the quantification of the impacts of exchange rates and various trade policies, as well as the addition or deletion of supply markets, demand markets and/or routes, on supply and demand market prices in local currencies, and on the volume of product trade flows with implications for food security.

Monetary policy responses to COVID-19 in emerging European economies: measuring the QE announcement effects on foreign exchange markets

This paper examines the effects of quantitative easing (QE) announcements by emerging market central banks in Europe during the COVID-19 pandemic, particularly on exchange rates with a higher frequency setting. Two different methodologies are used for analysing the policy announcement effects. The first methodology is the event study method that measures the sample exchange rates' mean and cumulative mean abnormal return around the time of event. The second one is the time series approach that measures asymmetric behaviour of the exchange rate volatility to monetary policy shocks by employing exponential GARCH model. The results show that the foreign exchange markets respond to QE announcements in all selected countries. The response of exchange rates varies across countries and event windows. QE announcements cause appreciation of domestic currency in Hungary and Poland, and depreciation in Turkey. Additionally, the QE announcements increase exchange rate volatility in Hungary and Poland while they reduce volatility in Turkey. The asymmetric behaviour of domestic currencies prevails in all selected countries, but this asymmetry is sensitive to the exchange rate and the length of the window.

Trading Kuznets curve: empirical analysis for China

Due to inspiring growth over the past 20 years, the dynamics of Chinese exports have been the focus of many researchers. In contrast to current literature, this study examines the quadratic relationship between China's real exports to 154 partner countries and the income of trading partners from 1996 to 2019. The findings obtained from the second generational econometric analysis confirm cross-section dependence and heterogeneous slope among panel members. Second, while the GDP per capita of partner countries has a positive impact on China's exports, the quadratic of GDP per capita has a negative impact. These findings indicate an inverted U-shaped relationship between China's exports and GDP per capita of its partner countries-thus, validating the trading Kuznets curve (TKC) hypothesis. The appreciation of the Renminbi (RMB) has statistically significant negative effects on China's exports. From a policy perspective, Chinese policymakers could consider the TKC hypothesis when determining market and export strategies. Additionally, the Chinese monetary authority could consider stabilizing the value of the RMB.

Exchange rate expectation, abnormal returns, and the COVID-19 pandemic

This study analyzes the impact of the COVID-19 pandemic on exchange rates based on a comprehensive set of survey forecasts for more than 50 currency pairs. At the first stage, we assess whether the policy to manage the COVID-19 pandemic affects the expected path of exchange rates over the medium and long run. At the second stage, we adopt an event study analysis and identify the occurrences of abnormal returns on foreign exchange markets since the start of the COVID-19 pandemic. Our results suggest the presence of cumulated excess returns that are partly driven by macroeconomic fundamentals for major currencies. However, we find that policy responses to the COVID-19 pandemic have the strongest effect on cumulated excess returns, showing that foreign exchange markets take expected policy effects as an important determinant of future developments into account while expectations for minor currencies react stronger to response policies.

Do currency exchange rates impact gold prices? New evidence from the ongoing COVID-19 period

We apply the nonlinear autoregressive distributed lag method to examine the relationships between seven leading currency exchange rates and gold prices using daily data from January 2017 to April 2021. The results reveal that in the short term, while negative United States dollar (USD) to United Kingdom pound, negative USD to Canadian dollar, negative USD to Japanese yen, negative USD to Danish krone, and positive USD to euro exchange rates increase gold prices, a lagged positive USD to euro and lagged positive USD to Danish krone exchange rates decrease gold prices. A test of the pre-pandemic normal period reveals that the uneven and unpredictable impacts of six exchange rates on gold prices are particularly due to COVID-19. We find efficiency in the gold market, in line with the market efficiency hypothesis and random walk theory. Our findings indicate that gold acts as a safe-haven asset for investors during COVID-19.

Commentary on a method for testing resistance to shocks

This note tours the Narayan (2020a: Has COVID-19 Changed Exchange Rate Resistance to Shocks?) approach to testing for resistance of a time-series variable to shocks. We take a step-by-step account of this approach and demonstrate its applicability with respect to the crude oil price.•

The approach entails steps (1) to (8), as outline in the paper.

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Future researchers will find this method useful in evaluating the resistance of variables to not only COVID-19 shocks but to any shock which has had a sufficiently long life.

Measuring dynamic dependency using time-varying copulas with extended parameters: Evidence from exchange rates data

This study proposes a novel approach that investigates the dynamic dependency among exchange rates by extending time-varying copulas' parameters following an autoregressive moving average (ARMA) process. The process consists of an autoregressive part that explains the effect of the previous parameters and a forcing variable that measures the dependence structure between marginal variables. We apply this model to the daily data of the exchange rates of five Asian countries with the strongest economies before and during the 2020 pandemic, namely CNY/USD, IDR/USD, INR/USD, JPY/USD, and KRW/USD. The ARIMA-GARCH model was used to model the exchange rates data and estimate the dynamic dependence using time-varying copulas with the extended parameters. The dynamic dependencies between Chinas and the four countries' exchange rates before and during the 2020 pandemic was evidenced. Moreover, India is the country whose exchange rate has been most strongly affected by the pandemic. Some of the highlights of the proposed approach are:•

This paper provides two algorithms to investigate the dynamic dependencies among exchange rates data during a crisis and forecast the data using time-varying copulas with the extended parameters.

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There are four extended time-varying copulas' parameters which can measure the dynamic dependencies between variables.

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The computation procedure is easy to implement.

Regime Shifts in the Behaviour of International Currency and Equity Markets: A Markov-Switching Analysis

This paper examines regime switching behaviour and dynamic linkages among currency and equity markets of Eurozone, India, Japan and U.S. using a Markov-switching framework. First, we seek to characterize the market specific and common regime shifts in international stock and currency markets. Second, we aim to study regime-dependent conditional correlations across these markets. We estimate state-dependent models for the financial markets in a univariate Markov-switching Autoregression (MS-AR) as well as a multivariate Markov-switching Vector Autoregression (MS-VAR) framework. The paper utilizes weekly data from July, 1999 to October, 2020 to model the interactions among the markets. Our univariate results identify two-states viz. bull state (bear state) characterized by high returns (low returns) and low volatility (high volatility) for the stock market indices and Euro/USD and INR/USD returns. For the Yen/USD market the bull state corresponds to depreciation accompanied by low volatility. Further, we employ a multivariate formulation to study the regimes across asset classes which provides additional insights into the common states across the markets. Using the MS-VAR model encompassing stocks and currencies, we find a tranquil regime characterized by lower volatility and higher returns and a turbulent regime depicted by higher volatility and lower returns. Contemporaneous correlations among asset market pairs are sharper during the crises. Some of the turbulent periods highlighted in the analysis include the dot-com bubble burst, South American crisis, 9/11, Iraq war, housing bubble burst, global financial crisis, Eurozone debt crisis, Taper Tantrum, Brexit, U.S. Federal Government Shutdown, U.S.-China Trade War and the recent COVID-19 pandemic.

Predictability analysis of the Pound's Brexit exchange rates based on Google Trends data

During the last decade, the use of online search traffic data is becoming popular in examining, analyzing, and predicting human behavior, with Google Trends being a popular tool in monitoring and analyzing the users' online search patterns in several research areas, like health, medicine, politics, economics, and finance. Towards the direction of exploring the Sterling Pound's predictability, we employ Google Trends data from the last 5 years (March 1st, 2015 to February 29th, 2020) and perform predictability analysis on the Pound's exchange rates to Euro and Dollar. The period selected includes the 2016 UK referendum as well as the actual Brexit day (January 31st, 2020), with the analysis aiming at analyzing the Pound's relationships with Google query data on Pound-related keywords and topics. A quantile dependence method is employed, i.e., cross-quantilograms, to test for directional predictability from Google Trends data to the Pound's exchange rates for lags from zero to 30 (in weeks). The results indicate that statistically significant quantile dependencies exist between Google query data and the Pound's exchange rates, which point to the direction of one of the main implications in this field, that is to examine whether the movements in one economic variable can cause reactions in other economic variables.

A strong dollar: help or harm?

Strong policies that deliver stronger fundamentals and a stronger currency are very much in the national interest. There can be some short-term advantages to currency depreciation, but the United States is better served by making clear that we intend to pursue strong policies, and in turn that generates a well-functioning international order. There has been a lot of progress with internationalization of the Renminbi, but there are some pretty serious obstacles to its becoming a major reserve currency. Clearly the Chinese Renminbi is playing more of a role in international finance. However, there are foundations for being a major international currency, and right now China does not seem to be moving too quickly to build those. These include capital controls, heavy management of the exchange rate, and financial repression. The phase one managed trade deal with China has targets that are likely unachievable, and continuing protectionist US policies would more likely put upward pressure on the dollar. It would be nice for the US dollar to remain strong because we have really good policy and fundamentals. It seems more likely we're going to remain strong because looking at Europe, Japan, and China, nobody is an impressive competitor.

Navigating through the Mundellian Trilemma: A dataset of four decades

The Mundellian Trilemma has maintained its reputation of a sensible guiding framework regarding policy trade-offs among monetary independence, degree of exchange rate flexibility, and financial openness. This data article offers a unique access to explore the determinants and implications of different Trilemma configurations across 195 countries and over 58 years by providing macroeconomic, financial and policy choice data for 103 variables. The dataset has the potential to contribute to the investigation of the consequences of different Trilemma configurations by income group, size, and geographical position of the economies; to enrich international macroeconomics literature on the role of country idiosyncrasies in navigating through the Mundellian Trilemma, and to formulate policy-relevant conclusions.

Interest-parity conditions during the era of the classical gold standard (1880-1914)-evidence from the investment demand for bills of exchange in Europe

This paper examines interest-parity conditions that arguably held as regards the investment demand for bills of exchange during the classical gold standard (1880-1914). Contemporaneous guides to the foreign exchanges report that close connections between the exchange and discount rates arose mainly with bills traded in London and the major financial centres on the European continent. As implied by the interest-parity condition, and in particular when future exchange-rate movements were covered by a suitable long-bill transaction, weekly data do suggest that between Paris, Amsterdam, Berlin, Brussels, and London, the return from discounting bills of exchange in the local money market was roughly equivalent to the return from investing in foreign currency bills.

The Swiss franc safety premium

This paper applies a recent method proposed by Maggiori (The U.S. Dollar Safety Premium, 2013) to estimate the Swiss franc safety premium. The results show that the three-step instrumental variable approach as used by Maggiori does not work for the Swiss franc exchange rates. The price of risk estimates take unrealistic, negative values. One possible explanation is that the approach as it is used by Maggiori suffers from a measurement error for the expected exchange rate which represents a potential source of imprecision. By using the prediction of an augmented Fama regression to measure the expected exchange rate change, this measurement error can be avoided and the safety premium estimates become more realistic and closer to those obtained with a maximum likelihood-estimated GARCH approach. Overall, however, the GARCH approach still seems to be preferable to the instrumental variable approach.

Heterogeneous effects of oil shocks on exchange rates: evidence from a quantile regression approach

The determinants of exchange rates have attracted considerable attention among researchers over the past several decades. Most studies, however, ignore the possibility that the impact of oil shocks on exchange rates could vary across the exchange rate returns distribution. We employ a quantile regression approach to address this issue. Our results indicate that the effect of oil shocks on exchange rates is heterogeneous across quantiles. A large US depreciation or appreciation tends to heighten the effects of oil shocks on exchange rate returns. Positive oil demand shocks lead to appreciation pressures in oil-exporting countries and this result is robust across lower and upper return distributions. These results offer rich and useful information for investors and decision-makers.