U.S. Dollar Dynamics: How Important Are Policy Divergence and FX Risk Premiums?
IMF Working Papers, July 5, 2016
Source details
- Canonical URL
- U.S. Dollar Dynamics: How Important Are Policy Divergence and FX Risk Premiums?
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Bibliographic details
- Authors: Ravi Balakrishnan, Stefan Laseen, Andrea Pescatori
- Published: July 5, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498348416.001
Authors, date, and scope
- By Ravi Balakrishnan, Stefan Laseen, Andrea Pescatori
- July 5, 2016
- Investigates drivers of dynamics of major U.S. FX bilaterals
Methodology and approach
- Construct a novel measure of FX risk premiums using Consensus exchange rate forecasts.
- Use VAR analysis to identify drivers of exchange rate dynamics.
- Compare empirical findings with a simple theoretical model.
- Support empirical results with recent event studies.
Key findings
- Risk premium shocks play a key role in driving dynamics of the major U.S. FX bilaterals.
- Longer-term interest differentials also matter, especially for the Canadian $ and the Euro.
- Oil price shocks play a particularly important role for the Canadian $ (an oil exporter).
- Risk appetite shocks (e.g., VIX shocks) generally lead to U.S. dollar appreciation.
- The importance of risk premium and longer-term interest differential shocks fit well with a simple theoretical model and are supported by recent event studies.
Subject taxonomy and keywords
- Subject: Exchange rate adjustments, Exchange rate risk, Exchange rates, Financial regulation and supervision, Foreign exchange, National accounts, Return on investment
- Keywords: assets vis, C. risk premium estimate, constructed risk premium, Exchange rate adjustments, exchange rate movement, Exchange Rate risk, Exchange rates, exogenous risk premium process, Foreign exchange, FX risk premium, Global, monetary policy shock, monetary policy shocks, Return on investment, risk premium, SVAR, U.S. dollar, WP
Content in this bundle
- _wp16125 - Appendix 2