외환론
Foreign Exchange Theory
Lecture 4
1
Review: Exchange Rate Arrangement
• Floating currencies
• Managed floating
• Crawling pegs :
• Target zone
• Fixed/pegged currencies
• No separate legal tender
2
Review: Sterilized and Non-Sterilized Foreign
Exchange Intervention
Fed buys ForEx from Bank, which is an asset.
Sterilization part
3
Review: History of FX Regime Classification
• From De jure classifications
• To De facto classifications
• Why are there differences between the two
classifications?
– Existence of parallel markets
4
Why do parallel markets exist?
• The private market response to the incorrectly valued
exchange rate.
– Ex. Venezuelan government devalued its currency to VEF
4.3/USD in January 2011, but in the parallel market, it was VEF
9.25/USD!
5
Why do parallel markets exist?
• For instance, when monetary policy is too loose to
maintain peg,
• parallel rate (market-determined rate) will start
depreciating
• Eventually, an inevitable devaluation of an official rate
would follow.
• Parallel FX market better barometer of monetary policy
6
Source: Reinhart and Rogoff (2004) 7
Exchange Rate Arrangements across
Countries
• Reading
– Bekaert and Hodrick, Chapter 5
– Ilzetzki, Reinhart, and Rogoff (2019)
8
Questions
• Exchange rate arrangements
• What do countries do?
– Ilzetzki,Reinhart, and Rogoff (2019), Reinhart and Rogoff (2004)
9
Main Conclusions of Ilzetki et al. (2019)
• Still, regimes with limited flexibility remain in the majority.
• The U.S. dollar remains as the world’s dominant anchor
currency by a very large margin.
– The global role of the euro has stalled.
• Large accumulation of reserves since 2002.
– Exchange rate controls in an environment with reduced
exchange rate restrictions (or capital controls)
10
Anchor Currency Classification
• Freely floating: No anchor
• Relatively fixed (target zones): Based on FX volatility
• Managed float:
– Calculate one-year moving average of monthly absolute change
in exchange rate with respect to all candidate anchors (USD,
EUR, JPY, GBP, AUD, CNY)
11
Source: Ilzetzki, Reinhart and Rogoff (2017) 12
Source: Ilzetzki, Reinhart and Rogoff (2017)
13
Evolution of Anchor Currencies
• Large shift towards USD as anchor
• Emergence of DEM/EUR as anchor
• Several waves:
– Dismantling of the GBP zone
– Breakdown of Bretton Woods leads to emergence of DEM/EUR
– Collapse of the Soviet Union
14
Source: Ilzetzki, Reinhart and Rogoff (2017)
15
Source: Ilzetzki, Reinhart and Rogoff (2017)
16
US Dollar as a dominant currency
• 30% of countries are anchored to Euro
– They are confined to Europe. The role of Euro is limited globally.
• No country pegs to yen or pound at present.
– About 50% of Japan’s exports and over 70% of its imports are
denominated in U.S. dollars.
• Renminbi
– It is anchored to U.S. dollars.
17
US Dollar as a dominant currency
• Invoicing of international trade
– Large fraction of it is invoiced in dollars.
– Dollar’s share in invoicing for imported good is about 4.7 times
the share of U.S. goods in imports. (for Euro, it is about 1.2
times..)
• Bank funding
– Non-U.S. banks have very large amounts of dollar liabilities.
(about $10 trillion)
– 62% of foreign currency liabilities of non-U.S. banks are in
dollars.
18
US Dollar as a dominant currency
• Corporate borrowing
– 60% of foreign currency corporate borrowing is denominated in
dollars.
• Central bank reserve holding
– USD accounts for 64% of worldwide bank reserves
– Euro for 20%, Yen for 4%
19
Why did the world move toward dollars?
• Natural monopoly
– Convenience advantage of using a single currency for
international transactions
• Number of investors in bond markets (He et al. 2019)
– Dominant currency bonds are more liquid and lower rollover risk.
=> If countries’ trade and finance priced in dollars, CB
would try to stabilize dollar exchange rates.
20
Why did the world move toward dollars?
• Gopinath and Stein (2018)
• Large volume of USD invoicing, foreign exchange
reserves
• Results in high demand for safe (or USD) assets
– Different currencies have exchange rate risk.
• Leads to shortage of safe assets (e.g., US Treasuries)
– How to satiate this demand? Private banks create USD assets
and dollar deposits have lower return.
• Dollar financing becomes cheaper for EM exporting
firms.
• As EM firms issue dollar denominated debt, they hedge
by pricing exports in dollars. => they can borrow more. 21
Exchange Rate Classification
• Two classifications:
– Fine: 15 categories
– Course: 6 categories
22
Source: Ilzetzki, Reinhart and Rogoff (2017)
23
Source: Ilzetzki, Reinhart and Rogoff (2017)
24
Euro Zone and Other Currency Unions
• Euro floats. But Euro Zone not single sovereign entity
• IMF categorizes Euro Zone countries as freely floating
• IRR place currency unions at the bottom of flexibility
spectrum
• Define exchange rate arrangements at country not
currency level
• Even large countries have small vote share
• Introduction of Euro should reduce FX flexibility not
increase it
25
Source: Ilzetzki, Reinhart and Rogoff (2017)
26
Source: Ilzetzki, Reinhart and Rogoff (2017)
27
Source: Ilzetzki, Reinhart and Rogoff (2017,
2019) 28
Source: Ilzetzki, Reinhart and Rogoff (2017,
2019) 29
Source: Ilzetzki, Reinhart and Rogoff (2017,
2019) 30
Source: Ilzetzki, Reinhart and Rogoff (2017, 2019)
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