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The Economics of Currency Risk

Author

Listed:
  • 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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    Cited by:

    1. Janus, Jakub, 2025. "Global financial risk and uncovered interest parity premia in Central and Eastern Europe," Economic Modelling, Elsevier, vol. 148(C).
    2. Boermans, Martijn A. & Burger, John D., 2023. "Fickle emerging market flows, stable euros, and the dollar risk factor," Journal of International Economics, Elsevier, vol. 142(C).
    3. Xing Guo & Pablo Ottonello & Diego J. Perez, 2023. "Monetary Policy and Redistribution in Open Economies," Journal of Political Economy Macroeconomics, University of Chicago Press, vol. 1(1), pages 191-241.
    4. Dmitry Matveev & Francisco Ruge-Murcia, 2024. "Tariffs and the Exchange Rate: Evidence from Twitter," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 72(3), pages 1185-1211, September.
    5. Martin Kuncl & Dmitry Matveev, 2025. "Neutral rate of interest in a small open economy: The case of Canada," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 58(3), pages 990-1016, August.
    6. Zhou, Jiaxin & Wang, Shihao & Duan, Haipeng, 2025. "The impact of trade sanctions on financial risk: Empirical evidence from global data," Pacific-Basin Finance Journal, Elsevier, vol. 94(C).
    7. Kai Arvai & Nuno Coimbra, 2023. "Privilege Lost? The Rise and Fall of a Dominant Global Currency," Working papers 932, Banque de France.

    More about this item

    Keywords

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    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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