Working Paper: CEPR ID: DP17833
Authors: Signe Krogstrup; Linda Goldberg
Abstract: The risk sensitivity of international capital flow pressures is explored using a new Exchange Market Pressure index that combines pressures observed in exchange rate adjustments with model-based estimates of incipient pressures that are masked by foreign exchange interventions and policy rate adjustments. The sensitivity of capital flow pressures to risk sentiment including for so-called safe haven currencies, evolves over time, varies significantly across countries, and differs between normal time and extreme stress events. Across countries, risk sensitivities and safe haven status are associated with self-fulfilling exchange rate expectations and carry trade funding currencies. In contrast, association with more traditional macroeconomic country characteristics is weak.
Keywords: exchange market pressure; risk aversion; safe haven; capital flows; exchange rates; foreign exchange intervention; global financial cycle
JEL Codes: F32; G11; G20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| risk sentiment (D81) | capital flow pressures (F32) |
| global risk conditions (F65) | appreciation of safe haven currencies (F31) |
| capital flow pressures (F32) | exchange rate adjustments (F31) |
| capital flow pressures (F32) | traditional macroeconomic characteristics (E13) |
| risk sentiment (D81) | capital inflow pressures during risk-off periods (F32) |