Jonathan Kearns

Fear of Sudden Stops: Lessons From Australia and Chile

Abstract Latin American economies are exposed to substantial external vulnerability. Domestic imbalances and terms of trade shocks are often exacerbated by sharp shifts in the net supply of external capital (sudden stops). At times, these sudden stops can be the main shock. In this paper we explore ways of overcoming external vulnerability, drawing lessons from a detailed comparison of the response of Chile and Australia to recent external shocks and from Australia’s historical experience. We argue that in order to understand sudden stops and the mechanisms to smooth them it is useful to identify and then distinguish between two inter‐related dimensions of investors’ confidence: country‐trust and currency‐trust. Lack of country‐trust is the fundamental problem behind sudden stops. Lack of currency‐trust in turn weakens a country’s ability to deal with sudden stops and real external shocks. We discuss steps aimed to improve these two dimensions of investors’ confidence in the medium run, and policies to reduce the impact of country‐trust and currency‐trust weaknesses in the short run. 1. This paper is a revised version of the paper prepared for the Financial Dedollarization: Policy Options conference at the Inter‐American Development Bank, 1–2 December 2003. The views expressed in this paper are those of the authors and should not be attributed to the Central Bank of Chile, the Reserve Bank of Australia or any other institution with which they are affiliated. We thank Guy Debelle, Luci Ellis, Darren Flood, Ilan Goldfajn, Simon Guttmann, Paulo Mauro, Tony Richards and Alejandro Werner for their comments. Erwin Hansen provided excellent research assistance.

Commodity Currencies: Why are Exchange Rate Futures Biased if Commodity Futures are Not?

This paper adds to the well-documented puzzle of the forward bias of exchange rates. While the exchange rate of a small commodity-exporting economy, such as Australia, can be closely tied to commodity prices, this paper demonstrates empirically that a portfolio of commodity futures exhibits little, if any, bias. A microfounded small open economy model is developed in which the exchange rate depends on export commodity prices. This is used to demonstrate how systematic expectation errors about the monetary process could cause the bias in exchange rate forwards when there is an absence of bias in commodity futures.

Monetary Shocks at High-Frequency and Their Changing FX Transmission Around the Globe

We show that the impact of monetary policy on exchange rates has been growing significantly in recent years. Our results are established by a high-frequency event study of how key fixed income instruments - Overnight-Index Swaps (OIS) and Bonds - respond jointly with exchange rates to news about monetary policy from seven major central banks. News affecting short-term maturity bonds tend to have the strongest impact, highlighting the relevance of communication regarding the path of future monetary policy for exchange rate movements. Overall, our findings suggest that the external channel of monetary transmission has been alive and well, even though many central banks have hit the effective lower bound in recent years.

Monetary Policy's Rising FX Impact in the Era of Ultra-Low Rates

We show that the FX impact of monetary policy has been growing significantly. We use a high-frequency event study of the joint response of fixed income instruments and exchange rates to monetary policy news from seven major central banks spanning 2004-2015. News affecting short maturity bonds have the strongest impact, highlighting the relevance of communication regarding the path of future policy. The FX impact of monetary policy is state-dependent and is stronger the lower is the level of interest rates. A greater adjustment burden falls onto the exchange rate, as rates are increasingly constrained by the effective lower bound.