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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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References

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  1. Calvo, Guillermo A. & Reinhart, Carmen M. & Vegh, Carlos A., 1995. "Targeting the real exchange rate: theory and evidence," Journal of Development Economics, Elsevier, vol. 47(1), pages 97-133, June.
  2. Engel, C., 1996. "Long-Run PPP May Not Hold After All," Working Papers 96-05, University of Washington, Department of Economics.
  3. Frankel, Jeffrey A & Rose, Andrew K, 1995. "A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries," CEPR Discussion Papers 1128, C.E.P.R. Discussion Papers.
  4. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  5. McCallum, Bennett T., 1994. "A reconsideration of the uncovered interest parity relationship," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 105-132, February.
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  7. Andres, Javier & Hernando, Ignacio & Kruger, Malte, 1996. "Growth, inflation and the exchange rate regime," Economics Letters, Elsevier, vol. 53(1), pages 61-65, October.
  8. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fixing for Your Life," NBER Working Papers 8006, National Bureau of Economic Research, Inc.
  9. Lucio Sarno & Mark P. Taylor, 2002. "Purchasing Power Parity and the Real Exchange Rate," IMF Staff Papers, Palgrave Macmillan, vol. 49(1), pages 5.
  10. 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, vol. 17(4), pages 597-614, August.
  11. Dominique Desruelle & Alessandro Zanello, 1997. "A Primeron the IMF's Information Notice System," IMF Working Papers 97/71, International Monetary Fund.
  12. Steven B. Kamin & John H. Rogers, 1997. "Output and the real exchange rate in developing countries: an application to Mexico," International Finance Discussion Papers 580, Board of Governors of the Federal Reserve System (U.S.).
  13. 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, vol. 105(4), pages 862-79, August.
  14. Bergman, U. Michael & Hansson, Jesper, 1999. "Real Exchange Rates and Switching Regimes," Working Papers 1999:4, Lund University, Department of Economics, revised 08 Jun 2000.
  15. Lafrance, Robert & Osakwe, Patrick & St-Amant, Pierre, 1998. "Evaluating Alternative Measures of the Real Effective Exchange Rate," Working Papers 98-20, Bank of Canada.
  16. 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.
  17. Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 13-47, March.
  18. 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, vol. 110(4), pages 975-1009, November.
  19. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  20. Nucci, Francesco & Pozzolo, Alberto F., 2001. "Investment and the exchange rate: An analysis with firm-level panel data," European Economic Review, Elsevier, vol. 45(2), pages 259-283, February.
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Citations

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Cited by:
  1. Cerrato, Mario & Kim, Hyunsok & MacDonald, Ronald, 2013. "Equilibrium exchange rate determination and multiple structural changes," Journal of Empirical Finance, Elsevier, vol. 22(C), pages 52-66.
  2. H. L. Leon & Serineh Najarian, 2003. "Asymmetric Adjustment and Nonlinear Dynamics in Real Exchange Rates," IMF Working Papers 03/159, International Monetary Fund.
  3. Mario Cerrato & Hyunsok Kim & Ronald Macdonald, 2010. "Three-Regime Asymmetric STAR Modeling and Exchange Rate Reversion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1447-1467, October.
  4. George Kapetanios & Yongcheol Shin, 2002. "Unit Root Tests in Three-Regime SETAR Models," Working Papers 465, Queen Mary, University of London, School of Economics and Finance.
  5. Nikolaou, Kleopatra, 2008. "The behaviour of the real exchange rate: Evidence from regression quantiles," Journal of Banking & Finance, Elsevier, vol. 32(5), pages 664-679, May.
  6. 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, vol. 26(1), pages 118-125, January.
  7. 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.
  8. Kleopatra Nikolaou, 2007. "The behaviour of the real exchange rate: Evidence from regression quantiles," Money Macro and Finance (MMF) Research Group Conference 2006 46, Money Macro and Finance Research Group.
  9. 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, vol. 19(4), pages 692-711, October.
  10. H. L. Leon & Serineh Najarian, 2003. "Time-Varying Thresholds," IMF Working Papers 03/181, International Monetary Fund.
  11. 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, vol. 19(4), pages 648-661, October.
  12. Balázs Égert & Maroje Lang, 2006. "Foreign exchange interventions in a small emerging market: the case of Croatia," Economic Change and Restructuring, Springer, vol. 39(1), pages 35-62, June.
  13. Hyginus Leon & Serineh Najarian, 2005. "Asymmetric adjustment and nonlinear dynamics in real exchange rates," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(1), pages 15-39.

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