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Dread of Depreciation

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  • Jayasri Dutta

Abstract

We specify an empirical framework to detect the effects of official intervention on real exchange rate dynamics. Using data for 27 advanced and emerging market economies, we find evidence that interventions are a near-universal practice; almost all countries intervene when real exchange rates depreciate; interventions reduce the degree of persistence in real exchange rates; and the defense of an overvalued currency tends to be contractionary.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 02/63.

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Length: 36
Date of creation: 01 Apr 2002
Date of revision:
Handle: RePEc:imf:imfwpa:02/63

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  1. Jeffrey A. Frankel and Andrew K. Rose., 1995. "A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries," Center for International and Development Economics Research (CIDER) Working Papers, University of California at Berkeley C95-052, University of California at Berkeley.
  2. Eichenbaum, Martin & Evans, Charles L, 1995. "Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(4), pages 975-1009, November.
  3. Kamin, Steve B. & Rogers, John H., 2000. "Output and the real exchange rate in developing countries: an application to Mexico," Journal of Development Economics, Elsevier, Elsevier, vol. 61(1), pages 85-109, February.
  4. Lafrance, Robert & Osakwe, Patrick & St-Amant, Pierre, 1998. "Evaluating Alternative Measures of the Real Effective Exchange Rate," Working Papers, Bank of Canada 98-20, Bank of Canada.
  5. Paul De Grauwe & Isabel Vansteenkiste, 2001. "Exchange Rates and fundamentals - a Non-Linear Relationship?," CESifo Working Paper Series 577, CESifo Group Munich.
  6. Yilmaz, Kamil, 2003. "Martingale Property of Exchange Rates and Central Bank Interventions," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 21(3), pages 383-95, July.
  7. Charles Engel, 1998. "Long-Run PPP May Not Hold After All," Working Papers, University of Washington, Department of Economics 0050, University of Washington, Department of Economics.
  8. Andres, Javier & Hernando, Ignacio & Kruger, Malte, 1996. "Growth, inflation and the exchange rate regime," Economics Letters, Elsevier, Elsevier, vol. 53(1), pages 61-65, October.
  9. McCallum, Bennett T., 1994. "A reconsideration of the uncovered interest parity relationship," Journal of Monetary Economics, Elsevier, Elsevier, vol. 33(1), pages 105-132, February.
  10. Dominique Desruelle & Alessandro Zanello, 1997. "A Primeron the IMF's Information Notice System," IMF Working Papers 97/71, International Monetary Fund.
  11. Ilan Goldfajn & Rodrigo Valdés, 1997. "The Aftermath of Appreciations," Working Papers Central Bank of Chile, Central Bank of Chile 02, Central Bank of Chile.
  12. Lucio Sarno & Mark P. Taylor, 2002. "Purchasing Power Parity and the Real Exchange Rate," IMF Staff Papers, Palgrave Macmillan, vol. 49(1), pages 5.
  13. Sebastian Edwards & Miguel A. Savastano, 1999. "Exchange Rates in Emerging Economies: What Do We Know? What Do We Need to Know?," NBER Working Papers 7228, National Bureau of Economic Research, Inc.
  14. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  15. Cheung, Yin-Wong & Lai, Kon S., 1998. "Parity reversion in real exchange rates during the post-Bretton Woods period," Journal of International Money and Finance, Elsevier, Elsevier, vol. 17(4), pages 597-614, August.
  16. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 34(2), pages 647-668, June.
  17. Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 33(1), pages 13-47, March.
  18. Michael, Panos & Nobay, A Robert & Peel, David A, 1997. "Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(4), pages 862-79, August.
  19. Nucci, Francesco & Pozzolo, Alberto F., 2001. "Investment and the exchange rate: An analysis with firm-level panel data," European Economic Review, Elsevier, Elsevier, vol. 45(2), pages 259-283, February.
  20. Bergman, U. Michael & Hansson, Jesper, 1999. "Real Exchange Rates and Switching Regimes," Working Papers, Lund University, Department of Economics 1999:4, Lund University, Department of Economics, revised 08 Jun 2000.
  21. Reinhart, Carmen & Calvo, Guillermo, 2001. "Fixing for your life," MPRA Paper 13873, University Library of Munich, Germany.
  22. Calvo, Guillermo A. & Reinhart, Carmen M. & Vegh, Carlos A., 1995. "Targeting the real exchange rate: theory and evidence," Journal of Development Economics, Elsevier, Elsevier, vol. 47(1), pages 97-133, June.
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Citations

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Cited by:
  1. H. L. Leon & Serineh Najarian, 2003. "Asymmetric Adjustment and Nonlinear Dynamics in Real Exchange Rates," IMF Working Papers 03/159, International Monetary Fund.
  2. Kleopatra Nikolaou, 2007. "The behaviour of the real exchange rate: Evidence from regression quantiles," Money Macro and Finance (MMF) Research Group Conference 2006, Money Macro and Finance Research Group 46, Money Macro and Finance Research Group.
  3. Balázs Égert & Maroje Lang, 2006. "Foreign exchange interventions in a small emerging market: the case of Croatia," Economic Change and Restructuring, Springer, Springer, vol. 39(1), pages 35-62, June.
  4. Cerrato, Mario & Kim, Hyunsok & MacDonald, Ronald, 2013. "Equilibrium exchange rate determination and multiple structural changes," Journal of Empirical Finance, Elsevier, Elsevier, vol. 22(C), pages 52-66.
  5. George Kapetanios & Yongcheol Shin, 2002. "Unit Root Tests in Three-Regime SETAR Models," Working Papers, Queen Mary, University of London, School of Economics and Finance 465, Queen Mary, University of London, School of Economics and Finance.
  6. Nikolaou, Kleopatra, 2008. "The behaviour of the real exchange rate: Evidence from regression quantiles," Journal of Banking & Finance, Elsevier, Elsevier, vol. 32(5), pages 664-679, May.
  7. Sollis, Robert, 2009. "A simple unit root test against asymmetric STAR nonlinearity with an application to real exchange rates in Nordic countries," Economic Modelling, Elsevier, Elsevier, vol. 26(1), pages 118-125, January.
  8. H. L. Leon & Serineh Najarian, 2003. "Time-Varying Thresholds," IMF Working Papers 03/181, International Monetary Fund.
  9. Baharumshah, Ahmad Zubaidi & Liew, Venus Khim-Sen & Chowdhury, Ibrahim, 2010. "Asymmetry dynamics in real exchange rates: New results on East Asian currencies," International Review of Economics & Finance, Elsevier, Elsevier, vol. 19(4), pages 648-661, October.
  10. Balázs Égert & Maroje Lang, 2005. "Foreign Exchange Interventions in Croatia and Turkey: Should We Give a Damn?," William Davidson Institute Working Papers Series wp755, William Davidson Institute at the University of Michigan.
  11. McMillan, David G., 2009. "The confusing time-series behaviour of real exchange rates: Are asymmetries important?," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 19(4), pages 692-711, October.
  12. Hyginus Leon & Serineh Najarian, 2005. "Asymmetric adjustment and nonlinear dynamics in real exchange rates," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 10(1), pages 15-39.
  13. Cerrato, Mario & Kim, Hyunsok & MacDonald, Ronald, 2010. "Equilibrium Exchange Rate Determination and Multiple Structural Changes," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2010-39, Scottish Institute for Research in Economics (SIRE).
  14. Mario Cerrato & Hyunsok Kim & Ronald Macdonald, 2010. "Three-Regime Asymmetric STAR Modeling and Exchange Rate Reversion," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 42(7), pages 1447-1467, October.

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