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Brian Byongju Lee
Job Market Candidate
Stanford University
Department of Economics
579 Serra Mall
Stanford, CA 94305
650-804-5281
brianbj.lee@stanford.edu
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Research
The Exchange rate and Fundamentals (Job Market Paper)
summary slides
Major contributions of the paper are:
(1) Derive an open interest parity condition that links the exchange rate to economic fundamentals.
The residual term of the open interest
parity is now completely specified economic fundamentals.
(2) Beat the random walk hypothesis: economic fundamentals
predict exchange rate movements for high interest rate currencies.
Exchange rates of low interest rate currencies act like a random walk
because they are less correlated with fundamentals owing to their low risk.
For example, business cycles of U.S. predicts the movements of the exchange rates against the dollar.
The same thing is true for Japan.
(3) Resolve the forward premium puzzle: the forward premium puzzle is an isolated incident.
It happens when the risk awareness of investors is low, during economic expansion and for
low risk currencies.
Carry Trade and Global Financial Instability
Carry trades , based upon an opportunistic investment strategy that
takes advantage of interest rate
differential across countries, are identified
the cause of the large-scale depreciation of peripheral
currencies in the later
half of 2008. A simultaneous equations model, which is derived from a
conceptual
partial equilibrium model for a local foreign exchange market, is
estimated from a cross-sectional sample.
The results also suggest that larger
yen appreciation than the dollar was brought about by a lack of the
local
supply of the yen rather than a more severe crunch of yen credits.
The Economic Origin of Letters of
Credit
This paper discusses the economic origin of letters of credit, an instrument widely used in
international trade, whose origin is attributed to the practice of merchant banks in the 19th centry. For the
analysis, the business process of the institution is drawn and compared with the legacy institution, bills of
exchange. The advantage of the new institution is reducing the total commercial credit risk by actively
incorporating merchant banks who are better positioned to take credit risk. Similarity with the legacy
institution implies that the new institution is incremental in procedural innovation and the active market of
acceptances among merchant banks played the role of an enforcing organization for the new institution.
Finally, the economic incentives of participants in international trade, exporters, importers and merchant
banks were essential in introduction and wide adoption of the new institution under the unstable economic
circumstances.
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