In order to gain a better empirical understanding of the international financial implications of currency movements, we construct a database of international currency exposures for a large panel of countries over 1990-2004. We show that trade-weighted exchange rate indices are insufficient to understand the financial impact of currency movements and that our currency measures have high explanatory power for the valuation term in net foreign asset dynamics. Exchange rate valuation shocks are sizable, not quickly reversed, and may entail substantial wealth redistributions. Further, we show that many developing countries have substantially reduced their negative foreign currency positions over the last decade. (F31, F32, G15)

This paper employs a dynamic factor model with endogenous regional clustering and extreme value adjustment properties to construct a world interest rate, as well as regional factors, based on country-specific short-run real interest rates from 43 markets. We find that global and regional factors play crucial roles in determining local rates among advanced countries, while local factors are more important among emerging markets. Further, convenience yields essentially affect both global and regional rates, especially in the longer run. Moreover, the relationship between global and local rates depends crucially on capital account openness, while the choice of exchange rate regime is a critical determinant of the transmission of regional factors. Lastly, we show that a U.S. nominal rate shock would raise the global real rate a quarter later, with a stronger impact observed before the U.S. rate hits the zero lower bound in 2008.

The exchange-rate regime is often seen as constrained by the monetary policy trilemma, which imposes a stark tradeoff among exchange stability, monetary independence, and capital market openness. Yet the trilemma has not gone without challenge. Some (e.g., Others (e.g., This paper studies the coherence of international interest rates over more than 130 years. The constraints implied by the trilemma are largely borne out by history.

Financial Instability, Reserves, and Central Bank Swap Lines in the Panic of 2008 by Maurice Obstfeld, Jay C. Shambaugh and Alan M. Taylor. Published in volume 99, issue 2, pages 480-86 of American Economic Review, May 2009