Speaker: Charles M. Engel

Date: Tuesday, May 28, 2019

Time: 3:30pm-5:00pm

Venue: Room 333, HSBC Business School Building

Introduction

Charles M. Engel is currently the Hester professor in the economics department at the University of Wisconsin-Madison. He received his B.A. from the University of North Carolina at Chapel Hill, Ph.D. from the University of California, Berkeley. His research fields are international economics and macroeconomics. He has since 2001 been an editor of the Journal of International Economics, which is a top field journal in international economics. He has served on the Board of Editors for American Economic Review (April 2002 – March 2008). Professor Engel is a very productive researcher with many publications in top level journals. His research has appeared in the Journal of Monetary Economics, American Economic Review, Journal of International Economics, Journal of International Money and Finance, Review of Economic Studies, Journal of Political Economy, etc.

Abstract:

We find strong empirical evidence that economic fundamentals can well account for nominal exchange rate movements. The important innovation is that we include the liquidity yield on government bonds as an explanatory variable. We find impressive evidence that changes in the liquidity yield are significant in explaining exchange rate changes for all of the G10 countries. Moreover, after controlling for liquidity yields, traditional determinants of exchange rates adjustment toward purchasing power parity and monetary shocks are also found to be economically and statistically significant. We show how these relationships arise out of a canonical two-country New Keynesian model with liquidity returns. Additionally, we find a role for sovereign default risk and currency swap market frictions.