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Exchange Rate Reconnect

Author

Listed:
  • Andrew Lilley
  • Matteo Maggiori
  • Brent Neiman
  • Jesse Schreger

Abstract

It is surprisingly difficult to find economic variables that strongly comove with exchange rates, a phenomenon codified in a large literature as "exchange rate disconnect." We demonstrate that a variety of common proxies for global risk appetite, which did not comove with exchange rates prior to 2007, have provided significant in-sample explanatory power for currencies since then. Furthermore, during the 2007-2012 period, U.S. purchases of foreign bonds were highly correlated with these risk measures and with exchange rates. Our results support the narrative that the U.S. dollar's role as an international and safe-haven currency has surged since the global financial crisis.

Suggested Citation

  • Andrew Lilley & Matteo Maggiori & Brent Neiman & Jesse Schreger, 2022. "Exchange Rate Reconnect," The Review of Economics and Statistics, MIT Press, vol. 104(4), pages 845-855, October.
    • Handle: RePEc:tpr:restat:v:104:y:2022:i:4:p:845-855
    DOI: 10.1162/rest_a_00978
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    Citations

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    Cited by:

    1. Dainauskas, Justas, 2023. "Time-varying exchange rate pass-through into terms of trade," LSE Research Online Documents on Economics 120000, London School of Economics and Political Science, LSE Library.
    2. Oliver Holtemöller & Alexander Kriwoluzky & Boreum Kwak, 2024. "Is There an Information Channel of Monetary Policy?," Discussion Papers of DIW Berlin 2084, DIW Berlin, German Institute for Economic Research.
    3. Leonie Bräuer & Harald Hau, 2022. "Can Time-Varying Currency Risk Hedging Explain Exchange Rates?," Swiss Finance Institute Research Paper Series 22-77, Swiss Finance Institute.
    4. Georgiadis, Georgios & Müller, Gernot J. & Schumann, Ben, 2024. "Global risk and the dollar," Journal of Monetary Economics, Elsevier, vol. 144(C).
    5. Marco Pinchetti & Andrzej Szczepaniak, 2024. "Global Spillovers of the Fed Information Effect," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 72(2), pages 773-819, June.
    6. Georgios Georgiadis & Gernot J. Müller & Ben Schumann, 2023. "Dollar Trinity and the Global Financial Cycle," Discussion Papers of DIW Berlin 2058, DIW Berlin, German Institute for Economic Research.
    7. Kerstin Bernoth & Helmut Herwartz & Lasse Trienens, 2023. "The Impacts of Global Risk and US Monetary Policy on US Dollar Exchange Rates and Excess Currency Returns," Discussion Papers of DIW Berlin 2037, DIW Berlin, German Institute for Economic Research.
    8. Dainauskas, Justas, 2023. "Time-varying exchange rate pass-through into terms of trade," Journal of International Money and Finance, Elsevier, vol. 137(C).
    9. Kim, Jinhwan & Olbert, Marcel, 2022. "How does private firm disclosure affect demand for public firm equity? Evidence from the global equity market," Journal of Accounting and Economics, Elsevier, vol. 74(2).
    10. Bernoth, Kerstin & Herwartz, Helmut & Trienens, Lasse, 2024. "Interest Rates, Global Risk and Inflation Expectations: Drivers of US Dollar Exchange Rates," VfS Annual Conference 2024 (Berlin): Upcoming Labor Market Challenges 302351, Verein für Socialpolitik / German Economic Association.

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