Global financial system and exchange rates

This event was held as part of a series of high-level webinars that was livestreamed on our website to the general public as part of the 19th BIS Annual Conference.

The webinar "Global financial system and exchange rates" was delivered by Matteo Maggiori and followed by a discussion with Laura Alfaro and Linda Tesar on 16 December.

Global financial system and exchange rates

Matteo Maggiori speaks about FX policy when financial markets are imperfect, followed by a discussion with Laura Alfaro and Linda Tesar.

16 December 2020 | Bank for International Settlements


In his webinar, Mr Maggiori presented his paper "FX policy when financial markets are imperfect".

This paper provides a simple framework to understand the determination of exchange rates based on capital flows in imperfect financial markets. Capital flows drive exchange rates by altering the balance sheets of financiers that bear the risks resulting from international imbalances in the demand for financial assets. Such alterations to their balance sheets cause financiers to change their required compensation for holding currency risk, thus affecting both the level and volatility of exchange rates. Exchange rates are sensitive to imbalances in financial markets and seldom perform the shock absorption role that is central to traditional theoretical macroeconomic analysis. Flows and the risk-bearing capacity of intermediaries generate the exchange rate disconnect from fundamentals. Foreign exchange intervention, an ineffective policy under perfect capital markets, emerges as a central bank policy tool. It is the most effective when financial markets are disrupted and financial intermediaries more constrained. Its effectiveness is increased by the presence of capital controls that effectively segment the market. A number of open theoretical and empirical issues are discussed.

About the speaker

Matteo MaggioriMatteo Maggiori is an Associate Professor of Finance at the Stanford Graduate School of Business. His research focuses on international macroeconomics and finance. He is a co-founder and director of the Global Capital Allocation Project. His research topics have included the analysis of exchange rate dynamics, global capital flows, the international financial system, the role of the dollar as a reserve currency, tax havens, bubbles, expectations and portfolio investment, and very long-run discount rates. His research combines theory and data with the aim of improving international economic policy. He is a faculty research fellow at the National Bureau of Economic Research and a research affiliate at the Center for Economic Policy Research. He received his PhD from the University of California at Berkeley.

Among a number of honours, he is the recipient of the 2021 Fisher Black Prize awarded for the best financial economist under the age of 40, the 2019 Guggenheim Fellowship, and the 2019 Carlo Alberto Medal for the best Italian economist under the age of 40. His research has been funded by the National Science Foundation (CAREER grant).

About the discussants

Laura Alfaro is the Warren Alpert Professor of Business Administration at Harvard Business School. She is also a Faculty Research Associate in the National Bureau of Economic Research's International Finance and Macroeconomics Program and the International Trade and Investment Program, and member of the IFC Economic Advisory Board, the Latin American Financial Regulatory Committee (CLAAF), among others.

Professor Alfaro's research has been published in journals including the American Economic Review, Review of Economic Studies and Journal of International Economics, and in Harvard Business School cases related to international economics and, in particular, international capital flows, foreign direct investment, sovereign debt, trade and emerging markets. In 2008, she was honoured as a Young Global Leader by the World Economic Forum. Professor Alfaro served as Minister of National Planning and Economic Policy in Costa Rica from 2010 to 2012.

Linda Tesar is a Professor of Economics in the Department of Economics at the University of Michigan. She is a Research Associate at the National Bureau of Economic Research and the Editor of the IMF Economic Review. She has been a visitor in the Research Departments of the IMF, the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of Minneapolis.

Professor Tesar's research is in the field of international finance, with particular interests in the international transmission of business cycles and fiscal policy, the benefits of global risk-sharing and capital flows to emerging market economies, among others. Results of her research have been published in several journals, including the American Economic Review, the Journal of International Economics and the Review of Financial Studies. She received her doctorate from the University of Rochester.