exchange rates

Trade Deficit Rising!

Since 2017Q1. By Mr. Trump’s own metric, we’re losing. But it’s a stoopid metric for evaluating “unfair”-ness. From the last GDP release (which incorporates March trade release):Figure 1: Net exports to GDP (blue), and net exports excluding petroleum products (red), as a ratio to GDP, SAAR. NBER defined recession dates shaded gray. Orange denotes 2017Q1-2018Q1. Source: BEA 2018Q1 second release, NBER, and author’s calculations. Here’s a detail, in nominal dollar terms: Figure 2: Net exports to GDP (blue), and net exports excluding petroleum products (red), both nominal, SAAR. NBER defined recession dates shaded gray. Orange denotes 2017Q1-2018Q1. Source: BEA 2018Q1 second release, NBER, and author’s calculations. As noted in numerous instances (EconoFact, Steil/BI), trade deficits usually ...

Long Horizon Uncovered Interest Parity, Updated

About twenty years ago, while visiting the Research Department of the IMF, Guy Meredith poked his head in my office and wondered aloud whether interest differentials could reliably predict (in the right direction) subsequent exchange rate changes at horizons of three to five years. The resulting paper led in turn to production of this graph: Figure 1: Panel beta coefficients at different horizons. Notes: up to 12 months, panel estimates for 6 currencies against US$, euro deposit rates, 1980Q1-2000Q4; 3-year results are zero-coupon yields, 1976Q1-1999Q2; 5 and 10 years, constant yields to maturity, 1980Q1-2000Q4 and 1983Q1-2000Q4 (last observation corresponds to exchange rate data). Source: Chinn (2006). The Fama regression is:(1)     st+k – st = α + β(itk-itk*) + εt+k Where s is the log ex...

Guest Contribution: “Exchange rate forecasting on a napkin”

Today we are fortunate to present a guest post written by Michele Ca’ Zorzi (ECB) and Michal Rubaszek (SGH Warsaw School of Economics). The views expressed are those of the authors and do not necessarily reflect those of the ECB. We have just released a new ECB Working Paper entitled “Exchange rate forecasting on a napkin”. The title highlights our desire to go back to basics on the topic of exchange rate forecasting, after a work-intensive attempt to beat the random walk (RW) with sophisticated structural models (“Exchange rate forecasting with DSGE models,”). Cheung et al. (2017) have recently reaffirmed the difficulties of finding models that consistently outperform the RW; however they also concluded that the Purchasing Power Parity (PPP) model performs fairly well. The starting point ...

Guest Contribution: “The ECB’s Strong Euro Problem”

Today, we are fortunate to present a guest contribution written by Ashoka Mody, Charles and Marie Visiting Professor in International Economic Policy, Woodrow Wilson School, Princeton University. Previously, he was Deputy Director in the International Monetary Fund’s Research and European Departments.Guest The euro has appreciated 10 percent against the Swiss franc (CHF) over the past year. The U.S. dollar and the Japanese yen have not made similar gains vis-à-vis the franc. Tracking the franc’s movements relative to the major currencies gives an unusual window onto the deflation-fighting credentials of the world’s major central banks. It illustrates, in particular, the European Central Bank’s half-hearted efforts to fight the risk of price deflation. Financial markets have come to believe...

Comparative Performance of the UK Economy

There was no recession after Brexit. But a slowdown looks like it’s here now… Figure 1: Log real GDP for France (blue), UK (bold red), Germany (green), US (bold black), and euro area (teal), all normalized to 2016Q2. Source: OECD, BEA, author’s calculations. Notice that the UK has continued to grow (except with an essential stall in 2018Q1), but output has lagged other major economies. (Another depiction, comparing to G7 countries, is provided by Laurent Ferrara.) UK GDP growth has lagged its neighbors, even with a depreciated currency. Note however that the Baker, Bloom and Davis index of economic policy uncertainty remains elevated relative to the pre-Brexit average. Figure 2: Graph 1, Quarter on quarter SAAR growth rate of real UK GDP; Graph 2, Log real trade weighted UK pound, 2010=0; ...

Trump v. Treasury

Mr. Trump tweeted today: Russia and China are playing the Currency Devaluation game as the U.S. keeps raising interest rates. Not acceptable! — Donald J. Trump (@realDonaldTrump) April 16, 2018 U.S. Treasury reported on Friday: Pursuant to the 2015 Act, Treasury finds that no major trading partner of the United States met all three criteria in the current reporting period. Five major trading partners of the United States, however, met two of the three criteria for enhanced analysis in this Report. Additionally, one major trading partner, China, constitutes a disproportionate share of the overall U.S. trade deficit. These six economies – China, Japan, Korea, India, Germany, and Switzerland – constitute Treasury’s Monitoring List. Japan, Germany, and Korea have met two of the three criteria ...

Some Thoughts on Chinese Tariffs on US Exports: Tariff Incidence, Value Added, Exchange Rates

Reader Bruce Hall, opining on the impact of mooted Chinese tariffs on US hog and soybean exports. As with pork, it looks as if the cost of food is going down for Americans as the Chinese bury their citizens in food price increases. I’m teaching international trade this semester, so this is a good time to remind my students: a tariff’s incidence when the home country is large depends on the relative size (and elasticities) of the import demand and export supply curves. For instance, a 25% tariff on US soybeans, could result in a 25% increase in prices of imported soybeans in China. Or it could result in 0% if the US is a very small supplier in global markets. Well, the US is pretty large (largest single exporter), so let’s say 15% of the tariff is reflected in Chinese prices. The other 10% ...

The New Fama Puzzle, post-ZLB

In a previous post, I documented the fact that the Fama puzzle had transformed post-global financial crisis, so that for most currency pairs, interest rate differentials pointed in the right direction for subsequent exchange rate depreciation, from 2006 through end-2015 (Bussiere, Chinn, Ferrara, Heipertz (2018)). Here I show that the new puzzle persists through the end of 2017, a period when US interest rates were rising. First consider three month euro-currency interest differentials (eurodeposit data from 2016M02 onward from BoE and National Bank of Belgium). Figure 1: Three month euro-currency rates for US (blue), for euro area (red). NBER defined recession dates shaded gray. Source: Thomson Reuters thru 2016M02, Bank of England and National Bank of Belgium thereafter. If one estimates...

The World-Wide Fama Puzzle Reversal

In my previous post, I recounted “The New Fama Puzzle” as it applied to dollar exchange rates, with focus on the euro/dollar rate. A quick observation: the reversal also appears for non-US dollar based exchange rates (against euro, yen, pound). The Fama regression is: s+1 – s = α’ + β'(i-i*) + error First, consider Fama regression coefficients (β’) for the one year horizon, up to 2007M08, against the US dollar, yen, euro, and pound. Figure 1: Fama regression coefficients for various currency pairs, up to 2007M08. Source: BCFH (2018). Now, consider the corresponding Fama regression coefficients, after 2007M09. Figure 2: Fama regression coefficients for various currency pairs, after to 2007M09. Source: BCFH (2018). It might not be clear from Figure 1, but almost all the estimates are negativ...

Interest Differentials and Exchange Rate Changes Before and After the Global Crisis

Before 2007M08 and After 2007M09 If the joint hypothesis of uncovered interest rate parity (UIP) and rational expectations –- sometimes termed the unbiasedness hypothesis — held, then the slope of the regression lines (in red) would be indistinguishable from unity. In fact, they are significantly different from that value. This pattern of coefficient reversal holds up for other dollar-based exchange rates, as well as for other currency pairs (with a couple exceptions). The fact that the coefficient is positive in the post-global financial crisis period is what we term “the New Fama puzzle”. In a NBER working paper released today (No. 24342), coauthored with Matthieu Bussière (Banque de France), Laurent Ferrara (Banque de France), Jonas Heipertz (Paris School of Economics), we re-examine un...

Farm Sector Prices and Income under Mr. Trump

So far, so-so. Export prices trending sideways. Figure 1: Export price of wheat (red), corn (blue), and soybeans (green). NBER recession dates shaded gray. Source: BLS via FRED, NBER, and author’s calculations. Farm income trending sideways. Figure 2: Net farm income, in billions of 2017$, deflated by CPI. 2017 estimate from USDA as of Nov. 29, 2017, deflated by CPI. NBER defined recession dates shaded gray. Source: USDA, NBER, and author’s calculations. If the Administration should go through with withdrawal from NAFTA, prices should decline further as Mexican and Canadian barriers against US agricultural exports rise. If China should retaliate against U.S. agricultural exports in response to recent (solar panels, washing machines) and incipient protectionist measures, then prices and qua...