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International Macro-Finance

Paper Session

Sunday, Jan. 3, 2027 8:00 AM - 10:00 AM (EST)

Marriott Marquis Washington DC
Hosted By: American Economic Association
  • Chair: Moritz Lenel, Princeton University

Incomplete Markets and Exchange Rates

Emile Marin
,
University of California-Davis
Sanjay Singh
,
Federal Reserve Bank of San Francisco and University of California-Davis

Abstract

We show that allowing for imperfect risk-sharing within countries can reconcile the cyclicality of exchange rates with respect to aggregate consumption, i.e. the Backus-Smith puzzle, as long as exchange rates are risky with respect to idiosyncratic states. Using a tractable two-country, consumption-based asset pricing model, in equilibrium,  idiosyncratic risk must remain relatively high in the country experiencing higher consumption growth. Furthermore, we identify distinct roles for market incompleteness both within and across countries, to match key moments of exchange rates. Turning to household level data, we measure discount factor wedges which capture the effects of imperfect risk sharing and we find direct empirical support for the mechanism.

A Macroeconomic Model of the Cross-Section of Currencies

Aleksei Oskolkov
,
Princeton University
Diego Perez
,
New York University)

Abstract

We study the cross-section of currencies using a quantitative macroeconomic model with heterogeneous countries, segmented asset markets, and risk-averse financial intermediaries. The model admits a two-factor structure of bilateral exchange rates. The factors combine global business cycle shocks and financial shocks that reprice the business cycle risk. Countries’ exposures to these factors are heterogeneous and depend on their reliance on commodity exports and dollar asset holdings. Increases in risk aversion lead to capital flows that induce a depreciation of high-commodity currencies against low-commodity ones and an appreciation of the dollar against the rest of the world. We estimate the resulting factor structure empirically and use it to discipline the model. Our results indicate substantial heterogeneity in exchange rate drivers across countries, primarily determined by risk exposure. Riskier currencies are those of high-commodity countries that are most affected by the global business cycle an low-dollar countries that are most affected by shocks to the dollar value originating in the US. Currencies of countries combining both risk exposures are mostly driven by financial shocks. Currencies of countries with low risk exposures move less relative to the dollar, and their fluctuations are mostly determined by idiosyncratic shocks.

Are Exporters Naturally Hedged? Corporate Dollar Debt and Global Trade

Junhyong Kim
,
Korea Development Institute
Annie Soyean Lee
,
Johns Hopkins University
Saiah Lee
,
Ulsan National Institute of Science and Technology

Abstract

We study how dollar-denominated debt and firm heterogeneity affect exchange rate pass-through to trade, using Korean firm-level balance sheet and customs transaction data. Export-intensive firms do not borrow more in foreign currency, suggesting natural hedging is not a key driver of the currency denomination of debt. Exploiting the 1997 depreciation, we find higher foreign currency debt exposure led to lower export quantity growth and higher price growth for smaller firms, with the opposite for very large firms. Liquidity shortages constrain smaller firms, while larger firms offset debt burdens by expanding exports. The financial channel remains relevant in recent years.

Discussant(s)
Moritz Lenel
,
Princeton University
Nicolas Hommel
,
University of Chicago
JEL Classifications
  • E4 - Money and Interest Rates
  • F3 - International Finance