Article

The Macroeconomic Implications of a Key Currency

National Bureau of Economic Research, Inc, NBER Working Papers 01/2008;
Source: RePEc

ABSTRACT

We identify incentives generated by the Bretton Woods II system that may have contributed to the sub-prime liquidity crisis now working its way through the international monetary system. We then evaluate the persistent conjecture that the liquidity crisis is or will become a balance of payments crisis for the United States. Given that it happens, the additional costs associated with a sudden stop of net capital flows to the United States could be quite substantial. But we observe that emerging market governments have continued to acquire US assets even as yields have fallen, and the incentives for continuing to do so remain strong. Moreover, the Bretton Woods II system, which has clearly been the most resilient of the forces driving current markets, continues to generate low real interest rates in industrial countries and growth in emerging markets that will help limit the damage from the liquidity crisis. Copyright © 2009 Blackwell Publishing Ltd.

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    ABSTRACT: This paper shows than when there are significant costs for private agents to change their positions in foreign bonds, an incomplete markets two-country general equilib- rium monetary model with sticky prices can reproduce a "forward premium anomaly", an upward sloping term structure of uncovered interest parity (UIP) regression slope coefficients, Sharpe ratios for carry-trade strategies close to the data, and predicts a 2.3 basis-point decrease in the short-term foreign interest rate after an unexpected one standard deviation central bank purchase of foreign bonds. A crucial element of the analysis is the interaction between the central bank balance sheet, the private agents budget constraints, and market clearing conditions in both bond markets.
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    ABSTRACT: We identify incentives generated by the Bretton Woods II system that may have contributed to the sub-prime liquidity crisis now working its way through the international monetary system. We then evaluate the persistent conjecture that the liquidity crisis is or will become a balance of payments crisis for the United States. Given that it happens, the additional costs associated with a sudden stop of net capital flows to the United States could be quite substantial. But we observe that emerging market governments have continued to acquire US assets even as yields have fallen, and the incentives for continuing to do so remain strong. Moreover, the Bretton Woods II system, which has clearly been the most resilient of the forces driving current markets, continues to generate low real interest rates in industrial countries and growth in emerging markets that will help limit the damage from the liquidity crisis. Copyright © 2009 Blackwell Publishing Ltd.
    Full-text · Article · Jan 2008
  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: We identify incentives generated by the Bretton Woods II system that may have contributed to the sub-prime liquidity crisis now working its way through the international monetary system. We then evaluate the persistent conjecture that the liquidity crisis is or will become a balance of payments crisis for the United States. Given that it happens, the additional costs associated with a sudden stop of net capital flows to the United States could be quite substantial. But we observe that emerging market governments have continued to acquire US assets even as yields have fallen, and the incentives for continuing to do so remain strong. Moreover, the Bretton Woods II system, which has clearly been the most resilient of the forces driving current markets, continues to generate low real interest rates in industrial countries and growth in emerging markets that will help limit the damage from the liquidity crisis. Copyright © 2009 Blackwell Publishing Ltd.
    Full-text · Article · Jan 2009
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