U.S. dollar risk premiums and capital flows
By: prepared by Ravi Balakrishnan and Volodymyr Tulin.
Contributors: Tulin, Volodymyr.; International Monetary Fund. Western Hemisphere Dept.
Series: IMF working paper -- WP/06/160
Publisher: International Monetary Fund, Western Hemisphere Dept.
Published: 2006
Place of publication: Washington, D.C
Language: eng
Number of pages: 27
Subjects: Dollar, American -- Econometric models.; Capital movements -- Econometric models.; Foreign exchange rates -- Econometric models.; Interest rates -- United States -- Econometric models.; United States -- Economic conditions.; United States -- Economic policy.
Description: This paper sheds light on the attractiveness of U.S. assets by studying dollar risk premiums, calculated using Consensus exchange rate forecasts, and linking them to bilateral capital flows. The paper finds that the presence of negative dollar risk premiums (i.e. expectations of a dollar depreciation net of interest rate effects) amid record capital inflows could suggest that investors may favor U.S. assets for structural reasons. One possible explanation could be that the Asian crisis created a large pool of savings searching for relatively riskless investment opportunities, which were provided by deep, liquid, and innovative U.S. financial markets with robust investor protection. Moreover, the continued attractiveness of U.S. financial markets to European investors suggests that they offer a large array of assets, with different risk/return characteristics, that facilitate the structuring of diversified investment portfolios. Looking forward, this suggests that the allocative efficiency of U.S. financial markets could mitigate risks of a disorderly unwinding of global current account imbalances.
Notes: "June 2006."

Includes bibliographical references (p. 26-27).

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