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Mr. Thomas Dowling and Nicoletta Batini
Using an adaptation of the Uncovered Interest Parity (UIP) condition, this paper analyzes the drivers behind the large, symmetric exchange rate swings observed during the financial crisis of 2008-2010. Employing a Nelson-Siegel model, we estimate yield curves and decompose the exchange rate movements into changes we attribute to monetary policy and a residual. We find that the depreciation phase of the currencies in our sample was largely dominated by safe-haven effects rather than carry trade activity or other return considerations. For some countries, however, the appreciation that began at the end of 2008 seems largely to reflect downward movement in the cumulative revisions to nominal forward differentials, suggesting carry trade.
Mr. Thomas Dowling and Nicoletta Batini

quarter of 2010. This is in stark contrast to the Asian crisis of 1997–98 and the crisis following the Russian debt default in 1998 during which investors fled the currencies of the countries in crisis. To explain this phenomenon, Fratzcher (2009) tells a safe-haven story in which the global nature of the slowdown led investors to believe that negative shocks originating in the U.S. would affect foreign markets even more acutely. Kohler (2010) , however, argues that exchange rate movements during this crisis were characterized by both safe-haven effects and carry

Mr. Fei Han and Mr. Niklas J Westelius
The yen is an important barometer for the Japanese economy. Depreciations are typically associated with favorable economic developments such as increased corporate profits, rising equity prices, and upward pressure on domestic consumer prices. On the other hand, large and sharp appreciations run the risk of lowering actual and expected inflation, squeezing corporate profits, generating a negative wealth effect through depressed equity prices, and reducing confidence in the Bank of Japan’s efforts to reflate the domestic economy and achieve the inflation target. This paper takes a closer look at underlying drivers of rapid yen appreciations, highlighting the key role of carry-trade and the zero lower bound as important amplifiers.
International Monetary Fund. European Dept.

This statement provides information that has become available since the issuance of the staff report. The information does not alter the thrust of the staff appraisal. Following the expiration of the European program with Greece last week, the risk of renewed stress in the euro area has increased. So far, the reaction of financial markets has been relatively muted and contagion has not been significant. The yield on the 10-year Germany government bond has fallen by 26 basis points since the issuance of the staff report, reflecting safe haven effects. The

International Monetary Fund. Asia and Pacific Dept

also encourages carry trade activities (i.e., the taking of net short positions in yen), which increases the likelihood of a large appreciation in the yen as the risk of a carry trade reversal increases. Heightened uncertainty typically leads to an appreciation of the yen due to safe haven effects, which can be amplified by a reversal in carry trade activities. 2 Because interest rates in Japan are unable to adjust due to the effective zero lower bound (ZLB), yen appreciation is likely to be more pronounced than that of other safe haven currencies. Carry trade

International Monetary Fund

was about 3½ percent above its medium-term target path, although unexpected demand shifts diminished the reliability of this indicator. The effective real exchange rate depreciated markedly from end-1995 through the first quarter of 1997, but it strengthened again during the remainder of 1997, particularly against the deutsche mark, in part due to “safe haveneffects related to the financial crisis in Asia. Short-term interest rates remained close to 1½ percent throughout 1997, while long-term bond yields fell during 1997 by almost 100 basis points to about 3

Mr. Dennis P Botman

, large financing needs in emerging Asia, and the deleveraging of European banks. Despite greater opportunities at home, as noted in Chapter 8 , this trend is likely to continue under Abenomics, creating a source of benign spillover effects ( Lam 2013 ). Safe-haven effects . Japan is a major safe haven. When risk-off episodes occur, policymakers in safe-haven countries may have to deal with sharp real appreciations or surges in capital flows. 1 Transitory real appreciation may create hefty adjustment costs to the economy and, subsequently, economic dislocation when