Exchange Rate Reconnect

37 Pages Posted: 2 Aug 2019 Last revised: 13 Jan 2020

See all articles by Andrew Lilley

Andrew Lilley

Novi Financial, Inc.

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, Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 4 versions of this paper

Date Written: July 2019

Abstract

The failure to find fundamentals that co-move with exchange rates or forecasting models with even mild predictive power â?? facts broadly referred to as "exchange rate disconnect" â?? stands among the most disappointing, but robust, facts in all of international macroeconomics. In this paper, we demonstrate that U.S. purchases of foreign bonds, which did not co-move with exchange rates prior to 2007, have provided significant in-sample, and even some out-of-sample, explanatory power for currencies since then. We show that several proxies for global risk factors also start to co-move

strongly with the dollar and with U.S. purchases of foreign bonds around 2007, suggesting that risk plays a key role in this finding. We use security-level data on U.S. portfolios to demonstrate that the reconnect 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.

Suggested Citation

Lilley, Andrew and Maggiori, Matteo and Neiman, Brent and Schreger, Jesse, Exchange Rate Reconnect (July 2019). CEPR Discussion Paper No. DP13869, Available at SSRN: https://ssrn.com/abstract=3428393

Andrew Lilley (Contact Author)

Novi Financial, Inc. ( email )

1 Hacker Waya
Menlo Park, CA 94025

Matteo Maggiori

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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Brent Neiman

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 )

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Cambridge, MA 02138
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Jesse Schreger

Columbia University - Columbia Business School, Economics ( email )

420 West 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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