Global financial system and exchange rates


The webinar “Global financial system and exchange rates” was delivered by Matteo Maggiori and followed by a discussion with Laura Alfaro and Linda Tesar on December 16.

Global financial system and exchange rates

Matteo Maggiori talks about exchange rate policy when financial markets are imperfect, followed by a discussion with Laura Alfaro and Linda Tesar.

December 16, 2020 | Bank for International Settlements


In his webinar, Mr. Maggiori presented his article “Exchange rate policy when financial markets are imperfect”.

This article provides a simple framework for understanding the determination of exchange rates based on capital flows in imperfect financial markets. Capital flows determine exchange rates by altering the balance sheets of financiers who bear the risks resulting from international imbalances in demand for financial assets. Such changes in their balance sheets cause financiers to change their remuneration required for holding currency risk, thereby affecting both the level and volatility of exchange rates. Exchange rates are sensitive to financial market imbalances and seldom fulfill the shock absorbing role that is central to traditional theoretical macroeconomic analysis. The flows and the risk-taking capacity of intermediaries generate the disconnection of the exchange rate from the fundamentals. Foreign exchange intervention, an ineffective policy in perfect capital markets, emerges as a central bank policy tool. It is most effective when financial markets are disrupted and financial intermediaries more constrained. Its effectiveness is enhanced by the presence of capital controls that effectively segment the market. A number of open theoretical and empirical questions are discussed.

About the speaker

Matteo maggiori is Associate Professor of Finance at the Stanford Graduate School of Business. His research focuses on international macroeconomics and finance. He is co-founder and director of the Global Capital Allocation Project. His research topics have included the analysis of exchange rate dynamics, global capital flows, the international financial system, the role of the dollar as a reserve currency, tax havens, bubbles, expectations and investments of portfolio, and very long-term discount rates. His research combines theory and data with the aim of improving international economic policy. He is an academic researcher at the National Bureau of Economic Research and an affiliate researcher at the Center for Economic Policy Research. He received his doctorate from the University of California at Berkeley.

Among many honors, he is the recipient of the 2021 Fisher Black Prize awarded to the best financial economist under 40, the 2019 Guggenheim scholarship and the 2019 Carlo Alberto medal for the best Italian economist under 40. His research was funded by the National Science Foundation (CAREER grant).

About the discussants

Laura Alfaro is Professor Warren Alpert of Business Administration at Harvard Business School. She is also an Associate Research Professor in the International Finance and Macroeconomics Program of the National Bureau of Economic Research and the International Trade and Investment Program, and a member of the IFC Economic Advisory Board, Financial Regulatory Committee. Latin American (CLAAF), among others.

Professor Alfaro’s research has been published in journals such as the American Economic Review, the Review of Economic Studies, and the Journal of International Economics, and in Harvard Business School cases related to international economics and, in particular , international capital flows, foreign direct investment, sovereign debt, trade and emerging markets. In 2008, she was honored as a Young Global Leader by the World Economic Forum. Prof. Alfaro was Minister of National Planning and Economic Policy in Costa Rica from 2010 to 2012.

Linda Tesar is Professor of Economics in the Department of Economics at the University of Michigan. She is an associate researcher at the National Bureau of Economic Research and editor-in-chief of the IMF Economic Review. She has visited the research departments of the IMF, the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of Minneapolis.

Professor Tesar’s research is in the area of ​​international finance, with a particular interest in the international transmission of business cycles and fiscal policy, the benefits of global risk sharing, and capital flows to emerging market economies. , among others. The results of his research have been published in several journals, including the American Economic Review, the Journal of International Economics, and the Review of Financial Studies. She received her doctorate from the University of Rochester.

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Don F. Davis