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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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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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