Abstract
The decade prior to the Great Recession saw a boom in global trade and rising transportation costs. High-yielding commodity exporters׳ currencies appreciated, boosting carry trade profits. The Global Recession sharply reversed these trends. We interpret these facts with a two-country general equilibrium model that features specialization in production and endogenous fluctuations in trade costs. Slow adjustment in the shipping sector generates boom–bust cycles in freight rates and, as a consequence, in currency risk premia. We validate these predictions using global shipping data. Our calibrated model explains about 57% of the narrowing of interest rate differentials post-crisis.
Original language | English (US) |
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Pages (from-to) | 69-86 |
Number of pages | 18 |
Journal | Journal of Monetary Economics |
Volume | 85 |
DOIs | |
State | Published - Jan 1 2017 |
Bibliographical note
Publisher Copyright:© 2016 Elsevier B.V.
Keywords
- Carry trade
- Commodity trade
- Currency risk premia
- Exchange rates
- International risk sharing
- Shipping
- Trade costs