Helen Popper

The Exchange Rate Exposure of U.S. and Japanese Banking Institutions

In this paper, we examine the foreign exchange exposure of a sample of U. S. and Japanese banking firms. Using daily data, we construct estimates of the exchange rate sensitivity of the equity returns of the U.S. bank holding companies and compare them to those of the Japanese banks. We find that the stock returns of a significant fraction of the U. S. companies move with the exchange rate, while few of the Japanese returns that we observe do so. We next examine more closely the sensitivity of the U.S. firms by linking the U.S. estimates cross-sectionally to accounting-based measures of currency risk. We suggest that the sensitivity estimates can provide a benchmark for assessing the adequacy of existing accounting measures of currency risk. Benchmarked in this way, the reported measures that we examine appear to provide a significant, though only partial, picture of the exchange rate exposure of U. S. banking institutions. The cross-sectional evidence is also consistent with the use of foreign exchange contracts for the purpose of hedging. JEL Classification: F31, F23, G21, G28

Long-term covered interest parity: evidence from currency swaps

Abstract This paper constructs long-term arbitrage conditions using a now well- developed mechanism for hedging long-term currency positions, the currency swap. Using the arbitrage conditions, bond yields denominated in different currencies are compared across the onshore markets of Canada, Japan, Germany, Switzerland, the United Kingdom, and the United States, and within the Euromarket. The evidence indicates that long-term financial capital is as mobile across these markets as is short-term capital. This appears to be the case both within the Euromarket and across political jurisdictions.

Information sharing and central bank intervention in the foreign exchange market

Abstract This paper develops a model of information sharing among heterogeneously informed agents and it uses the model to examine a rationale for intervention in the foreign exchange market. The model shows that in a partially revealing rational expectations equilibrium, some agents can gain by sharing among themselves private information about transitory exchange rate disturbances. In this setting, a central bank can affect the exchange rate by aggregating and disseminating agents’ information. The paper also illustrates the usefulness of intervention as a way to transmit that information.

Official Exchange Rate Arrangements and Real Exchange Rate Behavior

We study the behavior of real exchange rates under various official designations of exchange rate arrangements. Examining many currencies, we find important differences across the designations. Most notably, real exchange rate mean reversion is fastest when nominal exchange rates are officially pegged. We also find a large nonlinear effect: adjustment is fastest when the real exchange rate deviates greatly from its mean. This nonlinear effect is also most striking among officially pegged currencies. Finally, we find that nominal exchange rates, rather than prices, do most of the adjusting.

Exchange Rates, Domestic Prices, and Central Bank Actions: Recent U.S. Experience

Central Banks that are primarily concerned with the behavior of prices will use monetary policy to insulate prices from exchange rate changes. Prices then appear unresponsive to the exchange rate. The observed relationships between prices and the exchange rate will reflect Central Bank actions instead of the underlying relationship between exchange rates and prices. This paper explicitly recognizes the role that policy plays in determing the observable relationships between exchange rates and prices, and in so doing, it illustrates how the underlying relationships can be unraveled. Using different empirical approaches, we examine the recent experience of the United States. We find that the prices of various nondurable goods, and even of some services, respond modestly to the exchange rate, and we find that the responses emerge most clearly when the role of monetary policy is explicitly considered. These findings are consistent with the hypothesis that the Federal Reserve acts in a way to mitigate the impact of exchange rate fluctuations on domestic prices.

Trilemma Stability and International Macroeconomic Archetypes

This paper uses the simple geometry of the classic, open-economy trilemma to introduce a new gauge of the stability of international macroeconomic arrangements. The new stability gauge reflects the simultaneity of a countrys choices of exchange rate fixity, financial openness, and monetary sovereignty. So, the new gauge is bounded and correspondingly non-Gaussian. We use the new stability gauge in nonlinear panel estimates to examine the post-Bretton Woods period, and we find that trilemma policy stability is linked to official holdings of foreign exchange reserves in low income countries. We also find that the combination of fixed exchange rates and financial market openness is the most stable arrangement within the trilemma; and middle-income countries have less stable trilemma arrangements than either low or high-income countries. The paper also characterizes international macroeconomic arrangements in terms of their semblance to definitive policy archetypes; and, it uses the trilemma constraint to provide a new gauge of monetary sovereignty.

Capital Flows, Capitalization, and Openness in Emerging East Asian Economies

We examine the international capital flows of seven East Asian emerging economies over the last decade and a half. We find that domestic capital market conditions appear to be the best predictors of the changes in the total capital flows of these countries. Overall, changes in capital market openness are less helpful in explaining the behavior of the recent capital flows of these economies. Finally, we find that, while US macroeconomic conditions are strong predictors of GDP growth in the region, US conditions matter very little for the regions capital flows.

Evaluating Exchange Rate Management: An Application to Korea

This paper uses data-rich estimation techniques to study monetary policy in an open economy. We apply the techniques to a small, forward-looking model and explore the importance of the exchange rate in the monetary policy rule. This approach allows us to discern whether a monetary authority targets the exchange rate per se, or instead simply responds to the exchange rate in order to achieve its other objectives. The approach also removes a downward bias on the estimate of the extent of inflation targeting. We find that this bias is important in the case of Korea, a de jure inflation targeter. In contrast to previous studies, our findings suggest that the Bank of Korea actively targets inflation, not the exchange rate. Apparently, the exchange rate has been only indirectly important in Koreas monetary policy.

Aggregate Price Changes and Dispersion: A Comparison of the Equity and Goods and Services Markets

Many existing studies have found a correlation between inflation and price dispersion in goods markets. In this paper, we document that a similar correlation can be found in equity markets. We estimate the correlation between overall price changes and dispersion in the NYSE and in the NASDAQ. Using quarterly data from 1975 to 1999, we compare the stock market correlations with those of goods markets. We find striking correlations in both sets of markets. The most prominent explanations of the goods market correlation (such as menu costs) cannot plausibly apply to equity markets. Thus, our findings indicate that the correlation appears to be more widespread than can be accounted for by the usual explanations.

Foreign Exchange Exposure and Exchange Rate Arrangements in East Asia

This paper shows that many East Asian firms are significantly exposed to foreign exchange risk. Their exposure appears to be much more widespread than is typical for the large industrialized economies. The East Asian firms are most exposed to fluctuations in the U.S. dollar, though the mark and yen are important in a few countries. The extent of exchange rate exposure has varied over the last decade, but it does not appear to have diminished. The most widespread exchange rate sensitivity (not just the most exchange rate fluctuation) occurred during the Asian Crisis period; this is evident even after accounting for the local macroeconomic conditions that affect aggregate local returns. Finally, the East Asian evidence examined here provides no support for the idea that an exchange rate peg reduces foreign exchange exposure.