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Fear of Appreciation

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  • Levy-Yeyati, Eduardo
  • Sturzenegger, Federico
  • Gluzmann, Pablo

Abstract

In recent years the term “fear of floating” has been used to describe exchange rate regimes that, while officially flexible, in practice intervene heavily to avoid sudden or large depreciations. However, the data reveals that in most cases (and increasingly so in the 2000s) intervention has been aimed at limiting appreciations rather than depreciations, often motivated by the neomercantilist view of a depreciated real exchange rate as protection for domestic industries. As a first step to address the broader question of whether this view delivers on its promise, we examine whether this “fear of appreciation” has a positive impact on growth performance in developing economies. We show that depreciated exchange rates indeed lead to higher growth, but that the effect, rather than through import substitution or export booms as argued by the mercantilist view, works largely through the deepening of domestic savings and capital accumulation.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 42917.

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Date of creation: Nov 2007
Date of revision: Nov 2012
Handle: RePEc:pra:mprapa:42917

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Keywords: exchange rate regimes; fear of floating; economic growth; real exchange rates;

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References

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  1. Jay C. Shambaugh, 2004. "The Effect of Fixed Exchange Rates on Monetary Policy," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 119(1), pages 300-351, February.
  2. Eduardo Levy-Yeyati & Federico Sturzenegger, 2003. "To Float or to Fix: Evidence on the Impact of Exchange Rate Regimes on Growth," American Economic Review, American Economic Association, American Economic Association, vol. 93(4), pages 1173-1193, September.
  3. Eswar S. Prasad & Raghuram G. Rajan & Arvind Subramanian, 2007. "Foreign Capital and Economic Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(1), pages 153-230.
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  5. Augusto de la Torre & Eduardo Levy Yeyati & Sergio L. Schmukler, 2003. "Living and Dying with Hard Pegs: The Rise and Fall of Argentina's Currency Board," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
  6. Rose, Andrew K., 2007. "A stable international monetary system emerges: Inflation targeting is Bretton Woods, reversed," Journal of International Money and Finance, Elsevier, Elsevier, vol. 26(5), pages 663-681, September.
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  12. Eduardo Levy Yeyati, 2006. "Liquidity Insurance in a Financially Dollarized Economy," Business School Working Papers, Universidad Torcuato Di Tella liquid, Universidad Torcuato Di Tella.
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  15. Glüzmann, Pablo Alfredo & Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2012. "Exchange rate undervaluation and economic growth: Díaz Alejandro (1965) revisited," Economics Letters, Elsevier, Elsevier, vol. 117(3), pages 666-672.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Understanding the issue of Currency Wars
    by Amol Agrawal in Mostly Economics on 2010-11-16 12:19:40
  2. Réquiem para el modelo de sustitución de importaciones
    by ELY in Blog de Eduardo Levy Yeyati on 2011-02-25 23:20:00
  3. La Insoportable Levedad del RER
    by Generico in Economista Serial Crónico on 2010-04-07 11:18:00
  4. Falso trilema (para econs)
    by Javier Finkman in Exabruptos on 2010-05-14 09:24:00
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Steiner, Andreas, 2013. "The accumulation of foreign exchange by central banks: Fear of capital mobility?," Journal of Macroeconomics, Elsevier, Elsevier, vol. 38(PB), pages 409-427.
  2. Pierre-Guillaume Méon & Geoffrey Minne, 2011. "Mark my Words: Information and the Fear of Declaring one’s Exchange Rate Regime," Working Papers CEB, ULB -- Universite Libre de Bruxelles 11-040, ULB -- Universite Libre de Bruxelles.
  3. Grier, Kevin B. & Smallwood, Aaron D., 2013. "Exchange rate shocks and trade: A multivariate GARCH-M approach," Journal of International Money and Finance, Elsevier, Elsevier, vol. 37(C), pages 282-305.
  4. Alexis Cruz-Rodriguez, 2013. "Choosing and Assessing Exchange Rate Regimes: a Survey of the Literature," Revista de Analisis Economico – Economic Analysis Review, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines, vol. 28(2), pages 37-61, October.
  5. Arslan Razmi & Martin Rapetti & Peter Skott, 2011. "The Real Exchange Rate and Economic Development," UMASS Amherst Economics Working Papers, University of Massachusetts Amherst, Department of Economics 2011-08, University of Massachusetts Amherst, Department of Economics.
  6. Diallo, Ibrahima Amadou, 2011. "The effects of real exchange rate misalignment and real exchange volatility on exports," MPRA Paper 32387, University Library of Munich, Germany.
  7. Aizenman, Joshua, 2011. "Hoarding international reserves versus a Pigovian tax-cum-subsidy scheme: Reflections on the deleveraging crisis of 2008-2009, and a cost benefit analysis," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 35(9), pages 1502-1513, September.
  8. Berganza, Juan Carlos & Broto, Carmen, 2011. "Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 9/2011, Bank of Finland, Institute for Economies in Transition.
  9. Chowdhury, Mohammad Tarequl H. & Bhattacharya, Prasad Sankar & Mallick, Debdulal & Ulubaşoğlu, Mehmet Ali, 2014. "An empirical inquiry into the role of sectoral diversification in exchange rate regime choice," European Economic Review, Elsevier, Elsevier, vol. 67(C), pages 210-227.
  10. Marc Pourroy, 2013. "Inflation-Targeting and Foreign Exchange Interventions in Emerging Economies," Documents de travail du Centre d'Economie de la Sorbonne, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne 13074, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  11. Tavlas, George & Dellas, Harris & Stockman, Alan C., 2008. "The classification and performance of alternative exchange-rate systems," European Economic Review, Elsevier, Elsevier, vol. 52(6), pages 941-963, August.
  12. Eduardo Levy-Yeyati, 2011. "Exchange Rate Regimes," Business School Working Papers, Universidad Torcuato Di Tella 2011-02, Universidad Torcuato Di Tella.
  13. César Calderón and Eduardo Levy Yeyati, 2007. "Zooming in: From Aggregate Volatility to Income Distribution," Business School Working Papers, Universidad Torcuato Di Tella 2007-03, Universidad Torcuato Di Tella.
  14. de la Torre, Augusto & Didier, Tatiana & Pinat, Magali, 2014. "Can Latin America tap the globalization upside ?," Policy Research Working Paper Series, The World Bank 6837, The World Bank.
  15. Erick Lahura & Marco Vega, 2013. "Asymmetric effects of FOREX intervention using intraday data: evidence from Peru," BIS Working Papers 430, Bank for International Settlements.
  16. Couharde, Cécile & Sallenave, Audrey, 2013. "How do currency misalignments’ threshold affect economic growth?," Journal of Macroeconomics, Elsevier, Elsevier, vol. 36(C), pages 106-120.

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