{"id":{"repo_id":"cambridge","oai_identifier":"oai:www.repository.cam.ac.uk:1810/386734"},"canonical_url":"https://search.dev.ndltd.org/etd/cambridge/oai:www.repository.cam.ac.uk:1810/386734","repository":{"repo_id":"cambridge","name":"Cambridge University","base_url":"https://api.repository.cam.ac.uk/server/oai/request"},"display":{"title":"Essays on International Macroeconomics and Finance","abstract":"This dissertation consists of three chapters, each addressing a relevant area in international macroeconomics and finance. They are linked by their examination of how shocks in one country transmit internationally and how central banks can use monetary and exchange rate policies to insulate themselves from external shocks. In Chapter 1, Monetary and Exchange Rate Policies in a Global Economy, I develop a theory with both monetary policy and foreign exchange intervention (FXI) and study their optimality, interactions, and trade-offs in a global economy. A consensus in the small open economy literature is that optimal monetary policy and FXI separately stabilise inflation and the exchange rate. My paper focuses on two features of FXI that became salient during the COVID-19 pandemic and the Russian-Ukrainian war. First, FXI is used on a global scale: large emerging economies and even advanced economies are active users of FXI. Second, despite worldwide high inflation during the pandemic and war, central banks lowered the monetary policy rate and intervened in the foreign exchange market by selling the US dollar against the domestic currency. This is fundamentally different from the conventional inflation stabilisation policy of raising the interest rate. Should FXI focus on domestic inflation and output targeting or go beyond these objectives to respond to global business cycles and imbalances? To answer this question, this chapter develops an analytically tractable two-country framework where FXI balances internal and external objectives and characterises the optimal monetary policy and FXI rules in a closed form. Under international policy cooperation, optimal FXI mitigates the trade-off between domestic inflation and demand faced by monetary authorities. At the same time, optimal FXI targets world demand since it affects international prices. The model thus suggests a novel complementarity between conventional monetary policy and unconventional exchange rate policy tools and provides a rationale for their combined use. In Chapter 2, A Quantitative Assessment of Monetary and Exchange Rate Policies, I first calibrate the model developed in Chapter 1 and study the quantitative implications of FXI. Next, I study the popularity of FXI in a dollarized economy, focusing on the recent dollar dominance in international trade. First, I calibrate the model to match the currency carry trade returns and FXI data for major currencies. The result shows that without FXI, external shocks generate an inflation-output trade-off and weaken the independence of monetary policy. However, the optimal combination of monetary policy and FXI allows monetary authorities to stabilise domestic inflation and output with small interest rate changes and improves the monetary policy independence. Next, I study the role of FXI when all goods traded in international markets are priced in US dollars. Under dollar pricing, inefficient cross-currency price dispersion emerges due to incomplete exchange rate pass-through on import prices. I find that the optimal FXI mitigates this dispersion by influencing the relative prices of locally produced goods. Furthermore, the transmission of FXI is asymmetric across countries: it contributes more to domestic inflation stabilisation with limited inflationary pressure on the United States. These results suggest that dollarisation in international trade is a key driver of capital flow stabilisation policy in international finance. Chapter 3, Intervening against the Fed, is co-authored with Alexander Rodnyansky and Yannick Timmer. This chapter studies the effectiveness and mechanism of FXIs for mitigating US monetary policy spillovers. For identification, we use an event-study local projection difference-in-differences approach around each FOMC announcement. We combine high-frequency US monetary shocks with daily FXI data in a panel of multiple countries and identify the effect of FXI via deviation from the estimated policy rule. We exploit detailed firm-level microdata on daily stock prices and currency decomposition of corporate debt, allowing us to compare cross-sectional heterogeneity in stock price responses to monetary shocks and FXI within each country. We first provide evidence that, without interventions, contractionary US monetary policy shocks transmit internationally through a balance sheet channel: foreign exchange rates depreciate, and stock prices fall, driven by firms with US dollar debt. However, when countries counter-intervene, the spillover of a US monetary policy tightening is muted. FXIs entirely offset the depreciation of the domestic exchange rate and the reduction in stock prices for firms with US dollar debt. Our result suggests that “intervening against the Fed” mutes the balance sheet channel of exchange rates triggered by US monetary policy and can protect countries from exposure to the Global Financial Cycle.","abstract_html":"This dissertation consists of three chapters, each addressing a relevant area in international macroeconomics and finance. They are linked by their examination of how shocks in one country transmit internationally and how central banks can use monetary and exchange rate policies to insulate themselves from external shocks. In Chapter 1, Monetary and Exchange Rate Policies in a Global Economy, I develop a theory with both monetary policy and foreign exchange intervention (FXI) and study their optimality, interactions, and trade-offs in a global economy. A consensus in the small open economy literature is that optimal monetary policy and FXI separately stabilise inflation and the exchange rate. My paper focuses on two features of FXI that became salient during the COVID-19 pandemic and the Russian-Ukrainian war. First, FXI is used on a global scale: large emerging economies and even advanced economies are active users of FXI. Second, despite worldwide high inflation during the pandemic and war, central banks lowered the monetary policy rate and intervened in the foreign exchange market by selling the US dollar against the domestic currency. This is fundamentally different from the conventional inflation stabilisation policy of raising the interest rate. Should FXI focus on domestic inflation and output targeting or go beyond these objectives to respond to global business cycles and imbalances? To answer this question, this chapter develops an analytically tractable two-country framework where FXI balances internal and external objectives and characterises the optimal monetary policy and FXI rules in a closed form. Under international policy cooperation, optimal FXI mitigates the trade-off between domestic inflation and demand faced by monetary authorities. At the same time, optimal FXI targets world demand since it affects international prices. The model thus suggests a novel complementarity between conventional monetary policy and unconventional exchange rate policy tools and provides a rationale for their combined use. In Chapter 2, A Quantitative Assessment of Monetary and Exchange Rate Policies, I first calibrate the model developed in Chapter 1 and study the quantitative implications of FXI. Next, I study the popularity of FXI in a dollarized economy, focusing on the recent dollar dominance in international trade. First, I calibrate the model to match the currency carry trade returns and FXI data for major currencies. The result shows that without FXI, external shocks generate an inflation-output trade-off and weaken the independence of monetary policy. However, the optimal combination of monetary policy and FXI allows monetary authorities to stabilise domestic inflation and output with small interest rate changes and improves the monetary policy independence. Next, I study the role of FXI when all goods traded in international markets are priced in US dollars. Under dollar pricing, inefficient cross-currency price dispersion emerges due to incomplete exchange rate pass-through on import prices. I find that the optimal FXI mitigates this dispersion by influencing the relative prices of locally produced goods. Furthermore, the transmission of FXI is asymmetric across countries: it contributes more to domestic inflation stabilisation with limited inflationary pressure on the United States. These results suggest that dollarisation in international trade is a key driver of capital flow stabilisation policy in international finance. Chapter 3, Intervening against the Fed, is co-authored with Alexander Rodnyansky and Yannick Timmer. This chapter studies the effectiveness and mechanism of FXIs for mitigating US monetary policy spillovers. For identification, we use an event-study local projection difference-in-differences approach around each FOMC announcement. We combine high-frequency US monetary shocks with daily FXI data in a panel of multiple countries and identify the effect of FXI via deviation from the estimated policy rule. We exploit detailed firm-level microdata on daily stock prices and currency decomposition of corporate debt, allowing us to compare cross-sectional heterogeneity in stock price responses to monetary shocks and FXI within each country. We first provide evidence that, without interventions, contractionary US monetary policy shocks transmit internationally through a balance sheet channel: foreign exchange rates depreciate, and stock prices fall, driven by firms with US dollar debt. However, when countries counter-intervene, the spillover of a US monetary policy tightening is muted. FXIs entirely offset the depreciation of the domestic exchange rate and the reduction in stock prices for firms with US dollar debt. Our result suggests that “intervening against the Fed” mutes the balance sheet channel of exchange rates triggered by US monetary policy and can protect countries from exposure to the Global Financial Cycle.","abstract_has_math":false,"creators":["Yago, Naoki"],"institution":"University of Cambridge","degree_name":"Doctor of Philosophy (PhD)","degree_level":"Doctoral","degree_discipline":null,"degree_department":null,"school":null,"contributors":[],"advisors":["Carvalho, Vasco"],"committee_chairs":[],"committee_members":[],"year":2025,"date_issued":"2025-05-27","date_published":"2025-05-27","updated_at":"2026-07-22T22:24:30Z","subjects":["Capital Flows","Exchange Rates","Foreign Exchange Intervention","International Risk-Sharing","Optimal Targeting Rules","International Policy Cooperation","Monetary Policy Spillovers","Balance Sheet Channel","Dollar Debt"],"languages":[],"rights":[],"rights_urls":["https://apollo8-f-pro.lib.cam.ac.uk/bitstreams/7daac1bd-56b1-45d5-bf9b-b352e6d4416a/download","http://purl.org/NET/rdflicense/allrightsreserved"],"identifier_entries":[]},"links":{"outbound_url":"https://doi.org/10.17863/CAM.119827","outbound_label":"DOI","outbound_source":"dc:identifier.doi"},"metadata_groups":[{"id":"people","label":"People","entries":[{"key":"dc:contributor.advisor","label":"Advisor","values":["Carvalho, Vasco"]},{"key":"dc:contributor.sponsor","label":"Sponsor","values":["Faculty of Economics, The University of Cambridge Cambridge Endowment for Research in Finance, The University of Cambridge St Edmund’s College, The University of Cambridge"]},{"key":"dc:creator","label":"Author","values":["Yago, Naoki"]}]},{"id":"academic_context","label":"Academic Context","entries":[{"key":"dc:date.issued","label":"Date","values":["2025-05-27"]},{"key":"dc:publisher.institution","label":"Dc Publisher Institution","values":["University of Cambridge"]},{"key":"dc:relation.isreferencedby.uri","label":"Dc Relation Isreferencedby URI","values":["https://www.repository.cam.ac.uk/handle/1810/386734"]},{"key":"dc:type","label":"Dc Type","values":["Thesis"]},{"key":"dc:type.qualificationlevel","label":"Dc Type Qualificationlevel","values":["Doctoral"]},{"key":"dc:type.qualificationname","label":"Dc Type Qualificationname","values":["Doctor of Philosophy (PhD)"]}]},{"id":"subjects_keywords","label":"Subjects and Keywords","entries":[{"key":"dc:subject","label":"Dc Subject","values":["Capital Flows","Exchange Rates","Foreign Exchange Intervention","International Risk-Sharing","Optimal Targeting Rules","International Policy Cooperation","Monetary Policy Spillovers","Balance Sheet Channel","Dollar Debt"]}]},{"id":"language_rights","label":"Language and Rights","entries":[{"key":"dc:rights","label":"Dc Rights","values":["https://apollo8-f-pro.lib.cam.ac.uk/bitstreams/7daac1bd-56b1-45d5-bf9b-b352e6d4416a/download","http://purl.org/NET/rdflicense/allrightsreserved"]}]},{"id":"identifiers","label":"Identifiers","entries":[{"key":"dc:identifier.doi","label":"DOI","values":["https://doi.org/10.17863/CAM.119827"]},{"key":"dc:identifier.uri","label":"Identifier URI","values":["https://apollo8-f-pro.lib.cam.ac.uk/bitstreams/93890818-83c7-4390-ac30-55592d29539e/download"]}]},{"id":"additional","label":"Additional Metadata","entries":[{"key":"dc:description.abstract","label":"Abstract","values":["This dissertation consists of three chapters, each addressing a relevant area in international macroeconomics and finance. 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Second, despite worldwide high inflation during the pandemic and war, central banks lowered the monetary policy rate and intervened in the foreign exchange market by selling the US dollar against the domestic currency. This is fundamentally different from the conventional inflation stabilisation policy of raising the interest rate. Should FXI focus on domestic inflation and output targeting or go beyond these objectives to respond to global business cycles and imbalances? To answer this question, this chapter develops an analytically tractable two-country framework where FXI balances internal and external objectives and characterises the optimal monetary policy and FXI rules in a closed form. Under international policy cooperation, optimal FXI mitigates the trade-off between domestic inflation and demand faced by monetary authorities. At the same time, optimal FXI targets world demand since it affects international prices. The model thus suggests a novel complementarity between conventional monetary policy and unconventional exchange rate policy tools and provides a rationale for their combined use. In Chapter 2, A Quantitative Assessment of Monetary and Exchange Rate Policies, I first calibrate the model developed in Chapter 1 and study the quantitative implications of FXI. Next, I study the popularity of FXI in a dollarized economy, focusing on the recent dollar dominance in international trade. First, I calibrate the model to match the currency carry trade returns and FXI data for major currencies. The result shows that without FXI, external shocks generate an inflation-output trade-off and weaken the independence of monetary policy. However, the optimal combination of monetary policy and FXI allows monetary authorities to stabilise domestic inflation and output with small interest rate changes and improves the monetary policy independence. Next, I study the role of FXI when all goods traded in international markets are priced in US dollars. Under dollar pricing, inefficient cross-currency price dispersion emerges due to incomplete exchange rate pass-through on import prices. I find that the optimal FXI mitigates this dispersion by influencing the relative prices of locally produced goods. Furthermore, the transmission of FXI is asymmetric across countries: it contributes more to domestic inflation stabilisation with limited inflationary pressure on the United States. These results suggest that dollarisation in international trade is a key driver of capital flow stabilisation policy in international finance. Chapter 3, Intervening against the Fed, is co-authored with Alexander Rodnyansky and Yannick Timmer. This chapter studies the effectiveness and mechanism of FXIs for mitigating US monetary policy spillovers. For identification, we use an event-study local projection difference-in-differences approach around each FOMC announcement. We combine high-frequency US monetary shocks with daily FXI data in a panel of multiple countries and identify the effect of FXI via deviation from the estimated policy rule. We exploit detailed firm-level microdata on daily stock prices and currency decomposition of corporate debt, allowing us to compare cross-sectional heterogeneity in stock price responses to monetary shocks and FXI within each country. We first provide evidence that, without interventions, contractionary US monetary policy shocks transmit internationally through a balance sheet channel: foreign exchange rates depreciate, and stock prices fall, driven by firms with US dollar debt. However, when countries counter-intervene, the spillover of a US monetary policy tightening is muted. FXIs entirely offset the depreciation of the domestic exchange rate and the reduction in stock prices for firms with US dollar debt. 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Second, despite worldwide high inflation during the pandemic and war, central banks lowered the monetary policy rate and intervened in the foreign exchange market by selling the US dollar against the domestic currency. This is fundamentally different from the conventional inflation stabilisation policy of raising the interest rate. Should FXI focus on domestic inflation and output targeting or go beyond these objectives to respond to global business cycles and imbalances? To answer this question, this chapter develops an analytically tractable two-country framework where FXI balances internal and external objectives and characterises the optimal monetary policy and FXI rules in a closed form. Under international policy cooperation, optimal FXI mitigates the trade-off between domestic inflation and demand faced by monetary authorities. At the same time, optimal FXI targets world demand since it affects international prices. The model thus suggests a novel complementarity between conventional monetary policy and unconventional exchange rate policy tools and provides a rationale for their combined use. In Chapter 2, A Quantitative Assessment of Monetary and Exchange Rate Policies, I first calibrate the model developed in Chapter 1 and study the quantitative implications of FXI. Next, I study the popularity of FXI in a dollarized economy, focusing on the recent dollar dominance in international trade. First, I calibrate the model to match the currency carry trade returns and FXI data for major currencies. The result shows that without FXI, external shocks generate an inflation-output trade-off and weaken the independence of monetary policy. However, the optimal combination of monetary policy and FXI allows monetary authorities to stabilise domestic inflation and output with small interest rate changes and improves the monetary policy independence. Next, I study the role of FXI when all goods traded in international markets are priced in US dollars. Under dollar pricing, inefficient cross-currency price dispersion emerges due to incomplete exchange rate pass-through on import prices. I find that the optimal FXI mitigates this dispersion by influencing the relative prices of locally produced goods. Furthermore, the transmission of FXI is asymmetric across countries: it contributes more to domestic inflation stabilisation with limited inflationary pressure on the United States. These results suggest that dollarisation in international trade is a key driver of capital flow stabilisation policy in international finance. Chapter 3, Intervening against the Fed, is co-authored with Alexander Rodnyansky and Yannick Timmer. This chapter studies the effectiveness and mechanism of FXIs for mitigating US monetary policy spillovers. For identification, we use an event-study local projection difference-in-differences approach around each FOMC announcement. We combine high-frequency US monetary shocks with daily FXI data in a panel of multiple countries and identify the effect of FXI via deviation from the estimated policy rule. We exploit detailed firm-level microdata on daily stock prices and currency decomposition of corporate debt, allowing us to compare cross-sectional heterogeneity in stock price responses to monetary shocks and FXI within each country. We first provide evidence that, without interventions, contractionary US monetary policy shocks transmit internationally through a balance sheet channel: foreign exchange rates depreciate, and stock prices fall, driven by firms with US dollar debt. However, when countries counter-intervene, the spillover of a US monetary policy tightening is muted. FXIs entirely offset the depreciation of the domestic exchange rate and the reduction in stock prices for firms with US dollar debt. 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