Working Paper: NBER ID: w24286
Authors: Linda S. Goldberg; Signe Krogstrup
Abstract: Pressures on currencies manifest in exchange rate adjustments and international capital flows, and can also be offset by policy responses. This paper presents a theory-based measure of capital flow pressures, a new Exchange Market Pressure index, which combines pressures observed in exchange rate adjustments, official foreign exchange intervention and monetary policy changes. We use the index to identify so called safe-haven and risk-on status currencies and investigate the drivers of this status, showing the importance of country net foreign asset positions, size, and capital account openness. We also re-assess the contribution of the global financial factor in international capital flow pressures. The global factor explains a larger share of pressures on currencies measured using the EMP compared with using capital flow quantities. However, this global factor share is strongly dominated by idiosyncratic variation and only episodically large.
Keywords: capital flows; exchange rates; safe haven currencies; 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 |
|---|---|
| net foreign asset positions (F32) | EMP index (E01) |
| economic size (R12) | EMP index (E01) |
| capital account openness (F30) | EMP index (E01) |
| EMP index (E01) | safe haven status of currencies (F31) |
| global financial factor (F30) | EMP index (E01) |
| domestic monetary policy changes (E52) | EMP index (E01) |
| exchange rate management (F31) | EMP index (E01) |