The economics of currency risk
Files
Accepted manuscript
Date
2021-08-05
Authors
Hassan, Tarek A.
Zhang, Tony
Version
Accepted manuscript
OA Version
Citation
T.A. Hassan, T. Zhang. 2021. "The Economics of Currency Risk." Annual Review of Economics, Volume 13, Issue 1, pp. 281 - 307. https://doi.org/10.1146/annurev-economics-092220-103354
Abstract
This article reviews the literature on currency and country risk with a focus on their macroeconomic origins and implications. A growing body of evidence shows that countries with safer currencies enjoy persistently lower interest rates and a lower required return to capital. As a result, they accumulate relatively more capital than countries with currencies that international investors perceive as risky. Whereas earlier research focused mainly on the role of currency risk in generating violations of uncovered interest parity and other financial anomalies, more recent evidence points to important implications for the allocation of capital across countries, the efficacy of exchange rate stabilization policies, the sustainability of trade deficits, and the spillovers of shocks across international borders.