Exchange Rate Reconnect

35 Pages Posted: 9 Jul 2019 Last revised: 20 Dec 2019

See all articles by Andrew Lilley

Andrew Lilley

Harvard University, Department of Economics

Matteo Maggiori

Harvard University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Brent Neiman

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Jesse Schreger

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 4 versions of this paper

Date Written: December 2019

Abstract

It is surprisingly difficult to find economic variables that strongly co-move with exchange rates, a phenomenon codified in a large literature on “exchange rate disconnect.” We demonstrate that a variety of common proxies for global risk appetite, which did not co-move with exchange rates prior to 2007, have provided significant in-sample explanatory power for currencies since then. Furthermore, during the global financial crisis and its aftermath, U.S. purchases of foreign bonds were highly correlated with these risk measures as well as with exchange rates. Changes in this type of capital flow statistically explain as much as half of the quarterly variation in the US dollar during 2007-2012. We use security-level data on U.S. portfolios to demonstrate that this connection of U.S. foreign bond purchases to exchange rates is largely driven by investment in dollar- denominated assets rather than by foreign currency exposure alone. Our results support the narrative emerging from an active recent literature that the US dollar’s role as an international and safe-haven currency has surged since the global financial crisis.

Keywords: Capital Flows, Risk, Exchange Rates, Reserve Currencies

JEL Classification: E42, E44, F3, F55, G11, G15, G23, G28

Suggested Citation

Lilley, Andrew and Maggiori, Matteo and Neiman, Brent and Schreger, Jesse, Exchange Rate Reconnect (December 2019). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2019-94. Available at SSRN: https://ssrn.com/abstract=3416856 or http://dx.doi.org/10.2139/ssrn.3416856

Andrew Lilley

Harvard University, Department of Economics ( email )

Cambridge, MA
United States

HOME PAGE: http://https://scholar.harvard.edu/andrewlilley

Matteo Maggiori

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Brent Neiman (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/brent.neiman/index.html

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jesse Schreger

Columbia University - Columbia Business School

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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