Essays in International Finance and Monetary Economics

Diplôme Thèse Essays in International Finance and Monetary Economics eng 2023 2023 author Terracciano Tammaro 884669 director Hau Harald 762636 Recherche et enseignement GSEM (RESEM) 178 10.13097/archive-ouverte/unige:171644 urn:nbn:ch:unige-1716447 GSEM 124 This dissertation encompasses an ample examination of various facets of pressing research questions in financial economics, providing critical insights into the real effects of foreign-exchange derivatives markets as well as exploring the implications and interlinkages of new monetary ventures. Specifically, this work focuses on the dynamics of currency hedging, crypto markets, and the interactions between the issuance of a central bank digital currency (CBDC) with quantitative easing. In the first chapter, we investigate the link between FX hedging and firms’ currency choice. When exporters price their goods in a foreign currency, they are exposed to exchange-rate risk. However, they can hedge this risk by underwriting a foreign exchange (FX) forward contract, which means selling forward the currency in which they price their goods. In this paper, we study how the cost of FX hedging influences the currency choice of French exporters. Our identification strategy exploits an exogenous increase in the trading costs of FX forward contracts, that was triggered by a spike in the Greek default risk. First, we find that higher FX trading costs lower the probability of pricing in dollars and in local (i.e., buyer’s) currency for hedging firms. Second, we show that hedging firms price more their goods in dollars than in local currency. Third, we document that FX hedging affects the transmission of exchange-rate shocks to prices and find that FX hedging is associated with lower levels of exchange-rate pass-through. We conclude that FX hedging contributes to dollar dominance and to the exchange-rate disconnect puzzle. In the second chapter, we examine fluctuations in crypto markets and their relationships to global equity markets and US monetary policy. We identify a single price component—which we label the “crypto factor”—that explains 80% of variation in crypto prices, and show that its increasing correlation with equity markets coincided with the entry of institutional investors into crypto markets. We also document that, as for equities, US Fed tightening reduces the crypto factor through the risk-taking channel—in contrast to claims that crypto assets provide a hedge against market risk. Finally, we show that a stylized heterogeneous-agent model with time-varying aggregate risk aversion can explain our empirical findings, and highlights possible spillovers from crypto to equity markets if the participation of institutional investors ever became large. In the third chapter, we study how issuing a CBDC interacts with monetary policy. We consider conventional monetary policy and quantitative easing, and we find that a CBDC has a different impact on the equilibrium allocations depending on the ongoing monetary policy. Under quantitative easing, we show that commercial banks optimally liquidate their excess reserves to accommodate households’ demand for CBDC. Without limitations, this process could negatively affect lending and render quantitative tightening problematic. However, it is always possible to find specific conditions for which issuing a CBDC is neutral to the economy. FX Hedging Central Bank Digital Currency CBDC Currency Risk FX Derivatives Cryptocurrencies Cryptoassets Monetary Policy Global Financial Cycle Dewey 650 116 Geneva Finance Research Institute S4 false 723 Geneva Finance Research Institute (GFRI) f1a46ac0-aac3-47ff-b0e6-dadfa5f877bd Thesis Public PhD_Thesis_wellformatted.pdf 18164712 application/pdf 6008a10133be919befe940592677baf000d81efe669ff4ad03fbe5e4962efad4 eba3f41e-1ddd-41fe-a814-a8aca7afe080 Imprimatur Public TERRACCIANO_Tammaro_Imprimatur.pdf 202574 application/pdf 267e18439319d41a934688def687209d9fe5ca4f3846e2bd24dab24664e0e46a openAccess Faculté d'économie et de management / Geneva Finance Research Institute

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Essays in International Finance and Monetary Economics				2023	596	453

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Terracciano, Tammaro

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