Research Interests

Open Macroeconomics, International Finance, Macroeconomics

Working Papers

"Capital Controls and Foreign Exchange Market Intervention" Download / View

Small open economy models based on the classical trilemma are unable to explain coexistence of capital controls and volatile exchange rates in developing countries. The paper presents a New Keynesian small open economy model, where a policymaker finds the optimal international monetary policy portfolio of exchange rate regimes, capital controls, and domestic interest rates. The paper introduces policy-endogenous risk premium shock, which creates financial frictions; breaking exchange rate peg signals the country's economic instability and financial sector responds by raising the country's risk premium. Contrary to the classical theory, the results suggest that implementing both capital controls and managed float can be optimal, while domestic monetary policy is under controls.

"Revisiting PPP Puzzle: Nominal Exchange Rate Rigidity and Region of Inaction" with Seongho Song

Even though real exchange rates may converge to parity in the long run, the consensus emerging from an extensive literature appears to be that the rate of mean-reversion – a half-life of 3 - 5 years – is still too slow to be compatible with arbitrage. Hence, Rogoff (1996) argues, the purchasing power parity (PPP) puzzle. The paper revisits one of the infamous puzzles in international macroeconomics and investigates potential sources of rigidity. The paper first proposes that the slow convergence has been estimated because of the forex market intervention by the governments which claim to freely float their exchanges. We identify and exclude the periods when nominal exchange rates are de facto fixed using the specification of Klein and Shambaugh (2008). Secondly, the paper argues that the real exchange rates may not show any convergence if they are already converged and within the “region of inaction” and that therefore, examining inactive real exchange rates resulted in slow convergence estimates. We focus on the periods when deviations from PPP are present. We identify these periods by constructing the region of inaction – 1) by creating bands around averages of real exchange rates, assuming that real exchange rates converge to the long run averages, and 2) by using a Bayesian Dynamic Linear Model (DLM), assuming that real exchange rates may converge to the different levels. We study the data of nineteen goods CPI for eleven countries and use the mean group estimation as suggested by Imbs et al. (2005) to handle aggregation bias. The results confirm the propositions and make the puzzle less puzzling; we find the half-life estimate to be 8.20 months or within 5.5 - 15.517 months.

"Cost of Floating Exchange Rates: Should we fear to float?"

The paper explores the exchange rate regime-elastic risk premium quantitatively. This paper takes foreign investor’s perspective and studies how the trend of risk premium changes when the regime switches in ten emerging market economies through the event study framework. Using a daily data set, the events of de facto regime switching are identified following the comparable methodology used in Calvo and Reinhart (2002), and EMBI+ is used as a proxy for country risk. The results confirm that switching exchange rate regimes from fixed to floating incurs an abrupt increase in average risk premium. EMBI+ rises by 141.11 - 165.48 basis points (0.257 - 0.525 standard deviations) around the events and shows 205.72 - 340.30 basis points of 40-day average difference before and after the events. The abnormal return estimates during the events range from 0.0036 to 0.0075, which imply 8.31 - 225.85% increase in the returns of EMBI+ during the periods of breaking pegs.

Work in Progress

  • "Exchange Rate Determination in the Three-country Model"
  • "Market Liquidity and International Financial Crises" with David Munro
  • "Investigation of Uncovered Interest Parity during Zero-Lower-Bound Periods" with David Munro

Awards / Grants

  • CBRT 2017 Research Awards (3rd place) - Central Bank of the Republic of Turkey (2017)
  • Summer Research Grants - Department of Economics, Xavier University (2018 and 2019)