Notes: This figure shows the comparison of the text-based DFS index (right axis) with the cross-currency basis (CCB) (left axis) for selective countries that have the CCBs available. The DFS index is a quarterly index that measures the country's dollar funding conditions and is constructed through text classifications. The CCB is a deviation from the covered interest rate parity, with its negative spikes suggesting the period of dollar funding stress. The DFS index is constructed by the author using 5-steps "average" method described in Section IV. The CCBs are obtained from Refinitiv Eikon.
I construct a novel measure of dollar funding stress for a sample of 119 economies during the period 1980 - 2021. I name this measure the "Dollar Funding Shortage" (DFS) index. The DFS index is a country-level assessment of countries’ dollar funding conditions, and is constructed through text classifications using a natural language processing (NLP) model. I document that systemic dollar funding crises are more prevalent than other financial crises, and typically happen simultaneously with or precede currency and banking crises. Empirically, I find that such idiosyncratic dollar funding stress can adversely affect GDP, bank dollar lending, imports, and exports by firms that are more dependent on external dollar financing.
Notes: This figure shows the impulse responses of the nominal exchange rate to tariffs within 30 days. The upper panel uses the tariffs announcement date as the shock date. The lower panel uses the inception date as the shock date. For the "Double Weight" scheme, we calculated the magnitude of each tariff at the HS12 sector level. Tariff action data are obtained from Global Trade Alert (GTA).
“Trade Interventions, Exchange Rate, and Global Value Chains” with Rudolfs Bem and Nikhil Patel (In Progress) [Slides]
How does the exchange rate react to trade interventions? In this paper, we revisit the classical model of trade protectionism’s impact on the exchange rate based on a high-frequency global trade actions dataset. By constructing an accurate measure of trade policy shocks at the product-line level, our approach allows quantifying the exchange rate offset on trade interventions. Using the panel local projection method, we show that 1) a 1 percent increase of uniform import tariff will be offset by a 0.05-0.1 percent appreciation of the home currency to foreign currency, 2) non-trade barriers have a larger impact on the exchange rate movements, 3) exchange rate responds differently to tariff announcements versus inception, with the home currency depreciating in between the announcement and the inception date.
"Global Value Chains and Export Elasticity: the Role of Dollar Exchange Rate" (Draft coming soon!)
Using the World Input-Out (WIOD) and ADB Multi-Regional Input-Output (MRIO) data, this paper re-examines the impact of integration in global value chains (GVC) on the exchange rate elasticity of export volumes. Unlike previous studies, I depart from the traditional Mundell- Fleming model that draws an automatic link between exchange rates and exports through the trade competitiveness channel of exchange rates. Instead, I focus on analyzing such linkages under the "Dominant Currency Paradigm." Importantly, I look at three tracks explaining how the exchange rate affects export volumes through GVC integration using different measures of the strength of the dollar: the trade-weighted exchange rate (competitiveness channel), the bilateral dollar exchange rate with the export destination country (invoicing channel), and the broad dollar index (financial channel). Empirically, I show that the dollar invoicing channel dominates the competitiveness channel for explaining the (declining) exchange rate elasticity of export. This finding complements previous studies that provide important rationales in promoting participation in global value chains, yet highlights its important background should be based on the "dominant currency pricing." Furthermore, through the financial channel, the GVC integration can make the export more vulnerable to the USD funding pressure. Such a financial channel sheds light on the policy response to foster better dollar funding conditions in global banking systems given the increasing GVC integration for countries.
"Cross Currency Basis and Bank Lending: A Global and Multi-Country Perspectives" (In Progress)
In this paper, I propose a common factor approach in a multi-country setting to analyze the triangular relation between cross-currency basis (CCB), cross-border bank flows, and domestic investment. Empirically, I decompose currency’s CCB into 1) global component 2) country-specific component. After that, I compare the contributions of the factors, their evolution over time, and differences between advanced and emerging-market economies within my group of countries. I argue that the two parts have different implications on domestic financial conditions, depending on their international investment position. For the net creditor countries: if the global factor is the primary reason for the CCB, a tightening of global USD dollar funding will ease the domestic financial condition. This is because creditor countries decrease cross-border lending due to high FX hedging costs and turn to onshore investment in household assets. However, if a country-specific deterioration in USD funding is the dominant reason for the CCB, such "flight to safety " benefits would disappear. In this case, both domestic and cross-border lending will shrink. For the net debtor countries, a tightening of both components will decrease both cross-border and domestic lending. In such cases, domestic selling of assets combined with higher demand for domestic funding to replace external borrowing could push up domestic interest rates and further tighten domestic financial conditions.
This essay evaluates the effectiveness of the Fed swap line facilities in alleviating dollar liquidity stress during the Global Financial Crisis and the Covid -19 pandemic. Using high-frequency weekly auction operation results, I show that there exist substantial discrepancies across countries in terms of financial market response to the swap arrangement. Countries that benefit most from auction operations have the following four characteristics: 1) They already partnered with the Fed to access the central bank dollar liquidity swap 2) hold adequate FX reserves 3)have high exposure to the U.S. in trade. Strikingly, I find banks that have a higher currency mismatch are exposed negatively to the Fed swap facility - suggesting there exists an " informational channel" for announcing a large volume of operation.