Should government smooth exchange rate risk?

Dollarization, Exchange Rate Regimes and Government Quality

The dollarization of the domestic banking system represents a source of vulnerability for emerging market countries, and a debate has emerged over whether the exchange rate regime has an impact on the degree of dollarization. This paper argues that the regime is far less important than the literature has previously claimed. Unofficial dollarization results from a lack of faith in the domestic c...

Government Purchases and the Real Exchange Rate

Recent empirical research documents that an exogenous rise in government purchases in a given country triggers a persistent depreciation of its real exchange rate— which raises an important puzzle, as standard macro models predict an appreciation of the real exchange rate. This paper presents a simple model with limited international risk sharing that can account for the empirical real exchange...

VaR: Exchange Rate Risk and Jump Risk

Incorporating the Poisson jumps and exchange rate risk, this paper provides an analytical VaR to manage market risk of international portfolios over the subprime mortgage crisis. There are some properties in the model. First, different from past studies in portfolios valued only in one currency, this model considers portfolios not only with jumps but also with exchange rate risk, that is vital ...

Productive Government Purchases and the Real Exchange Rate*

Empirical research documents that an exogenous rise in government purchases in a given country triggers a depreciation of its real exchange rate. This raises an important puzzle, as standard macro-theories predict an appreciation of the real exchange rate. We argue that this prediction might reflect the conventional assumption that government purchases are unproductive. Using a simple frictionl...

Pricing Below Cost under Exchange-Rate Risk