This paper examines how shocks to the exchange rate and macroeconomic uncertainty affect the United States’ net foreign asset position. I employ a Structural Vector Autoregressive (SVAR) model incorporating a combination of external instruments, narrative identification, and shock-dependent restrictions to address the endogeneity of uncertainties and their relationship with net portfolio flows. The results indicate that exchange rate and macroeconomic uncertainty shocks help reduce the United States’ net foreign asset deficit. Notably, macroeconomic uncertainty has a more persistent impact than exchange rate shocks. While reducing the deficit increases macroeconomic fluctuations in the short run, it dampens them in the long run. Furthermore, the analysis shows that macroeconomic uncertainty shocks are associated with heightened exchange rate volatility. In contrast, greater exchange rate volatility tends to dampen macroeconomic uncertainty. These findings align with the literature on convenience yields and dominant currency pricing, suggesting that heightened volatility affects core economies by altering foreign demand for safe assets and destabilizing global terms of trade.

We analyze Covered Interest Parity (CIP) deviations across advanced and emerging economies post-crisis, using Libor and commercial paper data. Employing a lag-augmented local-projection framework, we leverage identified demand- and supply-driven commodity shocks and gauge their interaction with macroprudential tightenings. We find that a policy tightening alone deepens CIP deviations by 1–2 basis points in advanced economies and 15–20 in emerging markets. Demand shocks raise deviations by 2–4 basis points in advanced economies but reduce them by 5–10 in emerging markets, while supply shocks have more uniform effects. Macroprudential policy partially offsets demand-shock impacts but shows no interaction with other shocks. These results highlight the state-dependent effectiveness of macroprudential tools and the need for tailored regulatory design to manage cross-border funding risks.

Paper

This paper presents a novel approach to measuring the exchange rate uncertainty to explain the Covered Interest Rate Parity (CIP) Deviations. It employs an endogenous factor clustering model that captures daily fluctuations in exchange rates, unveiling pervasive shocks influencing market volatility, even amid financial crises. This model determines distinct patterns, including a break coinciding with the Great Financial Crisis, that shape the variation of identifiable currency clusters. I applied this method to the CIP deviations of LIBOR and Government rates across major currencies, demonstrating the economically significant effects of uncertainty for both. These effects remain robust, even considering different model specifications that account for interest rate dynamics and fluctuations in the broader dollar exchange. 

Presented in Society for Financial Econometrics (SoFiE) Annual Conference 2024 - Rio de Janeiro (Expected), European Economic Association Annual Conference - Barcelona 2023, 30th Finance Forum - Malaga, Spain, 9th Annual Conference of the International Association for Applied Econometrics (IAAE),  Ph.D. Student Conference of International Macroeconomics (Paris), University of Minnesota (Finance), the 29th Global Finance Conference - Braga, 38th Eurasia Business and Economics Society (EBES) - Warsaw, 23rd RSEP International Economics, Finance, and Business Conference - Rome, Rutgers University, Copenhagen Business School

(Very Outdated Version - See Slides for the latest results). (Slides) 

Presented at Universidad del Valle, V Congreso de Economía Colombiana (Macroeconomics Section) - Universidad de los Andes, Winner as Best Poster in the "V Congreso de Economía Colombiana" At the Universidad de los Andes.