published papers
published papers
This paper examines how private bank regulation and liquidity provided by the Federal Reserve in the US are related to deviations from the covered interest parity (CIP). We find evidence that the effects of bank liquidity on CIP deviations partially offset those resulting from regulatory changes in a sample of 11 OECD countries over the 2001-2019 period. This finding supports the conjecture that changes in private banks’ liquidity and regulation can significantly affect the cross-currency basis. Interestingly, the effects of liquidity on CIP deviations become more pronounced as bank regulation intensifies, reflecting interaction effects. One implication is that stricter regulations may amplify liquidity-related distortions, thereby increasing CIP deviations.
In this paper we extend a new Keynesian small open economy model with a segmented financial market featuring noise traders and financial intermediaries (FX dealers) as in Itskhoki and Mukhin (2021). The former ingredients generate deviations from the uncovered interest parity (UIP) condition. More precisely, in this setup portfolio decisions of the financial intermediaries add, endogenously, a time varying risk-premium element to the traditional UIP that depends on FX intervention (FXI) by the central bank and FX orders by foreign investors. We present closed form solutions for optimal FXI and monetary policy. We analyse the effectiveness of different strategies of FX intervention. Our findings are as follows: (i) FX intervention is a useful tool to improve welfare when financial markets are segmented; (ii) monetary and FX intervention policies present strong complementarities; (iii) fundamental shocks cause distortions through the portfolio balance channel and (iv) simple FX intervention rules effectiveness depends on the frequency of shocks hitting the economy.
The optimal response to adverse external shocks in an economy involves the choice of an exchange rate regime. While the traditional Mundell-Flemming inspired theories support a floating exchange rate, evidence shows that central banks intervene in foreign exchange markets regularly. One of the reasons for these interventions relies on the consequences of large depreciations triggering negative balance sheet effects in economies with dollarized liabilities as shown by Benigno et al. (2013) and Devereux and Poon (2011). This paper extends this literature by considering heterogeneous hedge to foreign currency debt present across sectors. Our findings support that leaning against the wind policy responses are optimal even when only a sector of the economy is affected by the credit constraints. We show that the vulnerability of the economy to large negative external shocks depends not only on the overall foreign debt, but also on its distribution across sectors.
In this paper we extend the model of Kato and Nishiyama (2005) by introducing fat-tailed shocks in a simple new Keynesian framework where the central bank explicitly considers the zero lower-bound constraint on interest rates. We find that shocks with `excess kurtosis' make monetary policy relatively more aggressive far away from the zero lower bound region though, this difference reverts as the economy gets closer to the constrained region. From a quantitative point of view, our findings suggest that variance-preserving shifts in kurtosis, in the shape of Laplace distributed shocks, do not produce significant effects on the optimal reaction of the central bank.