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The Economics of Currency Risk

Author

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  • Tarek A. Hassan

    (Department of Economics, Boston University, Boston, Massachusetts 02215, USA)

  • Tony Zhang

    (Board of Governors of the Federal Reserve System, Washington, DC 20551, USA)

Abstract

This article reviews the literature on currency and country risk with a focus on their macroeconomic origins and implications. A growing body of evidence shows that countries with safer currencies enjoy persistently lower interest rates and a lower required return to capital. As a result, they accumulate relatively more capital than countries with currencies that international investors perceive as risky. Whereas earlier research focused mainly on the role of currency risk in generating violations of uncovered interest parity and other financial anomalies, more recent evidence points to important implications for the allocation of capital across countries, the efficacy of exchange rate stabilization policies, the sustainability of trade deficits, and the spillovers of shocks across international borders.

Suggested Citation

  • Tarek A. Hassan & Tony Zhang, 2021. "The Economics of Currency Risk," Annual Review of Economics, Annual Reviews, vol. 13(1), pages 281-307, August.
  • Handle: RePEc:anr:reveco:v:13:y:2021:p:281-307
    DOI: 10.1146/annurev-economics-092220-103354
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    More about this item

    Keywords

    currency risk; country risk; capital flows; uncovered interest parity; carry trade; forward premium puzzle;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G1 - Financial Economics - - General Financial Markets
    • G3 - Financial Economics - - Corporate Finance and Governance

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