Working Paper: NBER ID: w30319
Authors: Zhengyang Jiang; Robert J. Richmond
Abstract: We show that exchange rate correlations tend to be explained by the global trade network while consumption correlations tend to be explained by productivity correlations. Sharing common trade linkages with other countries increases exchange rate correlations beyond bilateral linkages. We explain these findings using a model of the global trade network with market segmentation. Interdependent global production generates international comovements, while market segmentation disconnects the drivers of exchange rate correlations from the drivers of consumption correlations. Moreover, we show that the trade network generates common factors found in exchange rates. Our findings offer a trade-based account of the origins of international comovements and shed light on important frictions in international markets.
Keywords: exchange rates; global trade network; international comovements; market segmentation; productivity correlations
JEL Codes: F31; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Market segmentation (M31) | Disconnects the drivers of exchange rate correlations from those of consumption correlations (F31) |
| Trade network closeness (D85) | Exchange rate correlations (direct and indirect components) (F31) |
| Changes in trade network closeness (F12) | Changes in exchange rate correlations (F31) |
| Trade network closeness (D85) | Exchange rate correlations (F31) |
| Total factor productivity shocks (O49) | Consumption growth comovements (F62) |