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US shocks and global exchange rate configurations

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  • Fratzscher, Marcel

Abstract

The paper analyses the heterogeneity in the link between macroeconomic fundamentals and exchange rates. For a set of important US-specific economic shocks, it shows that such shocks have exerted a remarkably heterogeneous effect on global exchange rate configurations over the past 25 years. Despite a significant decline over time, this heterogeneity remains high as primarily currencies of a few industrialized countries provide the largest contribution to the adjustment of the effective US dollar exchange rate. The paper finds that this heterogeneity is not only due to policy choices of inflexible exchange rate regimes, but to an important extent due to market forces, in particular business cycle synchronization and the degree of financial integration – foremost in portfolio investment – but not to trade. The findings have implications for a potential unwinding of global imbalances and future exchange rate adjustment, as well as for monetary policy choices in emerging market economies. JEL Classification: F31, F4, G1

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0835.

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Date of creation: Nov 2007
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Handle: RePEc:ecb:ecbwps:20070835

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Keywords: cross-rates; exchange rate; global distribution; heterogeneity; shocks; transmission channels; US dollar;

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References

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Cited by:
  1. Andrea Fracasso & Stefano Schiavo, 2009. "Trade-imbalances networks and exchange rate adjustments: the paradox of a new Plaza. The XIVth Spring Meeting of Young Economists (SMYE-2009), Istanbul, April 2009," Sciences Po publications info:hdl:2441/10028, Sciences Po.
  2. Fratzscher, Marcel, 2009. "What explains global exchange rate movements during the financial crisis?," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1390-1407, December.
  3. Arteta, Carlos & Kamin, Steven B. & Vitanza, Justin, 2011. "The puzzling peso," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1814-1835.
  4. Fracasso, Andrea & Schiavo, Stefano, 2009. "Global imbalances, exchange rates adjustment and the crisis: Implications from network analysis," Journal of Policy Modeling, Elsevier, vol. 31(5), pages 601-619, September.

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