This report tests the hypothesis of a link between exchange rate policy and sovereign bonds. The main findings are: real exchange rate overvaluation significantly increases sovereign bond issue probability and raises bond spreads; spreads and the likelihood of issuing bonds depend on the exchange rate regime; exchange rate misalignment under...
This overview paper examines two main issues. The first is why the exchange rate matters, especially for emerging market economies. The second is under what circumstances and how countries have dealt with the challenges posed by the exchange rate in recent years in the context of inflation targeting. The article...
The authors have developed a model of international trade in which trade depresses real exchange rate volatility and exchange rate volatility impacts trade in products differently according to their degree of differentiation. In particular, commodities are less affected by exchange rate volatility than more highly differentiated products. These insights allow...
This paper describes research comparing the response of inflation to changes in exchange rate competitiveness in various regions of the world. The paper first presents evidence that an empirical relationship between the rate of inflation and the level of the real exchange rate, which was documented for Mexico in previous...
This paper studies the empirical and theoretical association between the duration of a pegged exchange rate and the cost experienced upon exiting the regime. It confirms empirically that exits from pegged exchange rate regimes during the past two decades have often been accompanied by crises, the cost of which increases...
The Main Directions of Monetary and Exchange Rate Policies of Georgia for the year 2001 shall rest on the following parameters: GDP growth - 4 %, annual inflation rate - 6 %. Taking into consideration economic growth it shall use only non-inflationary means of money supply so that the annual...
This paper investigates the design of an exchange rate policy for an economy where the domestic capital market is segmented from the global financial market, producers rely on credit to finance working capital needs, and the labor market is characterized by nominal contracts. We show that the choice of an...
The article emphasizes that for a country that chooses not to "permanently" fix its exchange rate through a currency board, or a common currency, or some kind of dollarization, the only alternative monetary policy that can work well in the long run is one based on the trinity of a...
The paper examines factors affecting exchange rate volatility, with an emphasis on structural features of the foreign exchange regime. It draws for the first time on detailed survey data collected by the IMF on foreign exchange market organization and regulations. Key findings are that decentralized dealer markets, regulations on the...
This paper explores a model intended to capture the interaction between exchange rate policy, fiscal policy, and outright default on foreign-currency denominated debt. It examines how the exchange rate affects the supply of short-term debt facing the government. It shows that under a credible hard peg currency board, default is...
This overview paper examines two main issues. The first is why the exchange rate matters, especially for emerging market economies. The second is under what circumstances and how countries have dealt with the challenges posed by the exchange rate in recent years in the context of inflation targeting. It finds...
This paper develops a model of endogenous exchange rate pass through within an open economy macroeconomic framework, where both pass-through and the exchange rate are simultaneously determined, and interact with one another. Pass-through is endogenous because firms choose the currency in which they set their export prices. There is a...
Inflation targeting must target the price level as opposed to forward-looking inflation for uniqueness of perfect foresight equilibria. Its performance is very similar to exchange rate targeting. Money targeting displays real exchange rate flexibility in response to foreign shocks, while exchange rate and inflation targeting permit accommodation of money demand...
"The objective of our paper is to investigate empirically the implications of the exchange rate regime for economic growth. Previous empirical work in this area has failed to identify a robust relationship between the choice of the exchange rate regime and growth. This white paper explains whether the nature of...
This paper studies the role of an increase in foreign exchange reserves in reducing currency volatility for emerging market countries. The study employs a panel of 28 countries over the period 1986-2002. Several control variables are introduced in the regressions to account for other factors affecting exchange rate volatility (monetary...
This paper examines whether the traditional sets of macro surprises, that most of the literature considers, are the only sorts of news that can explain exchange rate movements. It examines the intra-daily influence of a broad set of news reports, including variables which are not typically considered "fundamentals" in the...
When central banks set nominal interest rates according to an interest rate reaction function, such as the Taylor rule, and the exchange rate is priced by uncovered interest parity, the real exchange rate is determined by expected inflation differentials and output gap differentials. This paper examines the implications of these...
The article examines exchange rate pass-through into U.S. import prices in 29 manufacturing industries using eight exchange rate indexes. These indexes vary by the number currencies included; whether the weight on each currency is based on total trade with the United States or solely imports; and, whether the weights vary...
This paper empirically investigates the linkages between banking crises and exchange rate regimes, using a comprehensive data set including developed and developing countries over the last two decades. In particular, the paper examines whether the choice of exchange rate regime affects the likelihood, cost, and duration of banking crises. Empirical...
Existing theoretical and empirical studies draw conflicting conclusions as to whether exchange rate volatility will encourage or suppress FDI Foreign Direct Investment, largely because they divorce exchange rate fluctuations from economic conditions within the host country. This paper argues that the exchange rate and projected sales in the host country...
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