The Economics of Currency Risk

Tarek Hassan and Tony Zhang ()
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Tony Zhang: Board of Governors of the Federal Reserve System, Washington, DC 20551, USA

Annual Review of Economics, 2021, vol. 13, issue 1, 281-307

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.

Keywords: currency risk; country risk; capital flows; uncovered interest parity; carry trade; forward premium puzzle (search for similar items in EconPapers)
JEL-codes: E2 E4 F3 F4 G1 G3 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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https://doi.org/10.1146/annurev-economics-092220-103354
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Related works:
Working Paper: The Economics of Currency Risk (2020)
Working Paper: The Economics of Currency Risk (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:anr:reveco:v:13:y:2021:p:281-307

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DOI: 10.1146/annurev-economics-092220-103354

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