Working Paper: NBER ID: w31279
Authors: Masao Fukui; Emi Nakamura; JN Steinsson
Abstract: We study the consequences of “regime-induced” exchange rate depreciations by comparing outcomes for peggers versus floaters to the US dollar in response to a dollar depreciation. Pegger currencies depreciate relative to floater currencies and these depreciations are strongly expansionary. The boom is not associated with an increase in net exports, or a fall in nominal interest rates in the pegger countries. This suggests that expenditure switching and domestic monetary policy are not the main drivers of the boom. We develop a financially driven exchange rate (FDX) model in which multiple shocks originating in the financial sector drive exchange rates and households and firms can borrow in foreign currencies. Following a depreciation, UIP deviations lower the costs of borrowing from abroad and stimulate the economy, as in the data. The model is consistent with (unconditional) exchange rate disconnect and the Mussa facts, even though exchange rates have large effects on the economy.
Keywords: No keywords provided
JEL Codes: F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US dollar depreciation (F31) | pegged currencies depreciation (F31) |
| pegged currencies depreciation (F31) | GDP increase (O49) |
| pegged currencies depreciation (F31) | consumption increase (E20) |
| pegged currencies depreciation (F31) | investment increase (E22) |
| pegged currencies depreciation (F31) | net exports decrease (F69) |
| financial shocks (F65) | capital inflows (F21) |
| capital inflows (F21) | economic activity increase (E20) |