The Economics of Currency Risk

Tarek Hassan and Tony Zhang

No 27847, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This article reviews the literature on currency and country risk with a focus on its macroeconomic origins and implications. A growing body of evidence shows 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 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.

JEL-codes: E22 E4 F31 F34 F4 G12 G15 G3 (search for similar items in EconPapers)
Date: 2020-09
New Economics Papers: this item is included in nep-ifn, nep-mac and nep-opm
Note: AP CF EFG IFM ME
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Published as Tarek A. Hassan & Tony Zhang, 2021. "The Economics of Currency Risk," Annual Review of Economics, vol 13(1), pages 281-307.

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Journal Article: The Economics of Currency Risk (2021)
Working Paper: The Economics of Currency Risk (2020)
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