The Center for Global Economy and Business offers a small number of limited research grants to Stern faculty. The Center completed its fifth grant cycle in the Fall of 2013. All full-time faculty were invited to apply for grants. In November, 3 research grants were awarded to 5 Stern faculty members.
The following Stern faculty received Fall 2013 Center research grants (amount in parentheses):
- Xavier Gabaix and Matteo Maggiori, Finance ($7,500)
- Matteo Maggiori and Johannes Stroebel Finance ($25,000)
- Kim Ruhl, Economics ($3,195)
- Arun Sundararajan, IOMS ($9,000)
- Xavier Gabaix and Matteo Maggiori
We provide a theory of the determination of exchange rates based on capital flows in imperfect financial markets. Capital flows drive exchange rates by altering the balance sheets of financiers that bear the risks resulting from international imbalances in the demand for financial assets. Such alterations to their balance sheets cause financiers to change their required compensation for holding currency risk, thus impacting both the level and volatility of exchange rates. Our theory of exchange rate determination in imperfect financial markets not only rationalizes the empirical disconnect between exchange rates and traditional macroeconomic fundamentals, but also has real consequences for output and risk sharing. Exchange rates are sensitive to imbalances in financial markets and seldom perform the shock absorption role that is central to traditional theoretical macroeconomic analysis. We derive conditions under which heterodox government financial policies, such as currency interventions and taxation of capital flows, can be welfare improving. Our framework is flexible; it accommodates a number of important modeling features within an imperfect financial market model, such as non-tradables, production, money, sticky prices or wages, various forms of international pricing-to-market, and unemployment.