• [JMP] The Currency Forward Rate Bias of Emerging Market Economies and the Original Sin (pdf)
  
  Following Bacchetta et al. (2023), we measure the safety of a currency using its forward rate bias (FRB), which, when both UIP and CIP deviations exist, is equal to the covariance between foreign investors’ stochastic discount factor and the ex-post excess return on the local currency bond. A local currency bond denominated in a currency with a high expected forward rate bias provides a more effective consumption hedge for risk-averse foreign investors, thus increasing their demand for the bond. Empirical analyses of emerging market local currency bonds yield two key findings. First, foreign reserves are positively associated with the currency FRB. Second, an increase in the currency FRB leads to a higher local currency debt ratio for emerging market economies. This indicates that the emerging market economies with a higher forward rate bias are better positioned to overcome the original sin.

• Financial Friction and Wage Rigidity (pdf)
  
  We investigate how downward wage rigidity influenced declines in investment during the GFC period in countries in the eurozone. By introducing a novel measure—minimum quarterly wage growth rate during the crisis—we show that higher wage rigidity amplifies the impact of adverse shocks: sharper declines in investment, lower GDP, and larger current account surpluses. To replicate the empirical findings, we consider a small open economy RBC model that incorporates occasionally binding wage rigidity and collateral constraints. The model demonstrates that a debt tax could mitigate overborrowing and reduce both the probability and severity of crises.

•  Economic Policy Uncertainty, Capital Flows, and Macroeconomic Stability (pdf)
  
  This paper examines the impact of economic policy uncertainty (EPU) on cross-border capital flows and key macroeconomic variables. Our empirical analysis demonstrates that both global and country-specific uncertainty are shown to significantly reduce capital inflows, as evidenced across a range of empirical models, including panel regression, panel VAR, and Global VAR. While global EPU shocks negatively affect financial variables, their impact on real economic indicators is relatively limited. The analysis reveals varied responses depending on country-specific factors: Advanced economies tend to implement expansionary monetary policies to mitigate the effects of global EPU shocks. High-debt countries experience more pronounced production declines. We also observe heterogeneous responses across countries to the uncertainty shock: Emerging countries suffer from severe currency depreciation, while Japan uniquely attracts increased capital inflows during periods of heightened uncertainty.

• Charles Engel : cengel@ssc.wisc.edu

• Kenneth West : kdwest@wisc.edu

• JungJae Park : jjpark.economist@yonsei.ac.kr

Korea Energy Economics Institute (KEEI)

Department of Nuclear Energy Policy Research

405-11, Jongga-ro, Jung-gu, Ulsan-si, 44543, Korea 

Work: +82-52-714-2236 |  Email: ssong@keei.re.kr