Research
Who cares about the Renminbi?
With Vimal Balasubramaniam, Ila Patnaik, and Ajay Shah
Many researchers have examined the role of the Renminbi as an international currency, particularly after the Chinese authorities undertook policy initiatives for Renminbi internationalisation. We measure one aspect of Renminbi internationalisation: its role in global exchange rate arrangements as an anchor. We find that over 70 currencies have been sensitive to movements in the Renminbi over 2005-2017. Most of this global role, is the response of some countries to unanticipated Renminbi depreciation. However, the contribution to explained variance by the Renminbi is very small, less than 2% on average, even in East Asian and Pacific-Rim countries who are known to closely track the Renminbi. This suggests that the Renminbi has thus far achieved a small role in global exchange rate arrangements. The co-movement with the RMB is strongest for countries with export exposure to China. There is heterogeneity in this effect when conditioning on continent, exporter-type, import exposure and policy linkages suggesting multiple modes of currency internationalisation.
Can one hear the shape of a target zone?
With Jean-Louis Arcand, Max-Olivier Hongler, and Daniele Rinaldo
We develop a target zone model with realistic features such as finite exit time, nonstationary dynamics and heavy tails. Our rigorous characterization of risk corresponds to the dynamic counterpart of a mean-preserving spread. We explicitly solve for both stationary and transient exchange rate paths, and show how they are influenced by the distance to both the time horizon and the target zone bands. This enables us to show how central bank intervention is endogenous to both the distance of the fundamental to the band and the underlying risk. We discuss how the credibility of the target zone is shaped by the set horizon and the degree of underlying risk, and we determine a minimum time at which the required parity can be reached. We prove that the interplay of the diffusive component and the destabilizing risk component can yield an endogenous regime shift characterized by a threshold level of risk above which the target zone ceases to exist. All the previous results cannot obtain by means of the standard Gaussian and affine models. We recover by numerical simulations the different exchange rate densities established by the target zone literature.
A fistful of dollars: Transmission of global funding shocks to EMs
With Aakriti Mathur
In this paper, we study transmission of global funding shocks to emerging economies (EMs) from the perspective of interbank markets. Money markets enable banks to engage in risk-sharing against liquidity shocks and are sensitive to global funding conditions. Accordingly, we first show that interbank rates better reflect the magnitude of transmission of foreign liquidity shocks to EMs as compared to benchmark short-term bond yields. Next, we disentangle the transmission into its various channels, focusing in particular on two pull factors associated with the domestic banking microstructure: dependence on wholesale funding and share of foreign banks. Our results indicate that money market rates in EMs react to global shocks, and that in particular dependence on wholesale funding has a significant role to play. Finally, we provide evidence that tools of macro-prudential policy like reserve requirements can help alleviate liquidity shocks to the EM banking system, weakening this global transmission.