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Currency Crises in Reverse: Do Large Real Exchange Rate Appreciations Matter for Growth?

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  • Bussirère, Matthieu
  • Lopez, Claude
  • Tille, Cédric

Abstract

While currency crises have been extensively studied, the opposite phenomenon, large appreciations, has been far less researched. We fill this gap by providing an empirical exploration of historical episodes of large real exchange rate appreciations, using a sample of 28 advanced and 25 emerging market economies, with annual data going back to 1970. We focus on the impact of large appreciations on output growth. Our first finding is that countries experiencing large real exchange rate appreciations display distinct patterns: large appreciations significantly lower export growth and boost import growth on impact. Strikingly, however, output growth is higher, on average, despite the adverse impact on exports. Our second finding is that these aggregate numbers hide substantial heterogeneity, which we link to the nature of the shocks that cause the appreciation. In particular, appreciations associated with so-called “capital flow bonanzas” have a marked downward effect on growth. This pattern is consistent with the insights from a simple model that contrasts the impact of productivity shocks with that of capital inflows shocks. Higher productivity in the traded sector leads to a boom in traded output and a current account surplus, while higher foreign lending leads to a boom in non-traded output and an external deficit as traded output falls and consumption increases.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 44053.

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Date of creation: Jan 2013
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Handle: RePEc:pra:mprapa:44053

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Keywords: exchange rate; currency crises; endaka; international trade; international capital flows; lending booms; small open economy macroeconomics;

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References

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  1. Reuven Glick & Xueyan Guo & Michael Hutchison, 2004. "Currency Crises, Capital Account Liberalization, and Selection Bias," EPRU Working Paper Series, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics 04-11, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
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Cited by:
  1. Philip Lane, 2013. "International Capital Flows and Domestic Financial Conditions: Lessons for Emerging Asia," The Institute for International Integration Studies Discussion Paper Series iiisdp438, IIIS.
  2. Dennis P. J. Botman & Irineu E. Carvalho Filho & Raphael W. Lam, 2013. "The Curious Case of the Yen as a Safe Haven Currency: A Forensic Analysis," IMF Working Papers 13/228, International Monetary Fund.
  3. Coricelli, Fabrizio & Ravasan, Farshad R & Wörgötter, Andreas, 2013. "The origins of the German current account surplus: Unbalanced productivity growth and structural change," CEPR Discussion Papers 9527, C.E.P.R. Discussion Papers.
  4. Erick Lahura & Marco Vega, 2013. "Asymmetric effects of FOREX intervention using intraday data: evidence from Peru," BIS Working Papers 430, Bank for International Settlements.

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