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Fear of Appreciation

Author

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  • Levy-Yeyati, Eduardo

    (World Bank and Universidad Torcuato Di Tella)

  • Sturzenegger, Federico

    (Harvard University and Universidad Torcuato Di Tella)

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 neo-mercantilist 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 appear to induce 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.

Suggested Citation

  • Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2007. "Fear of Appreciation," Working Paper Series rwp07-047, Harvard University, John F. Kennedy School of Government.
  • Handle: RePEc:ecl:harjfk:rwp07-047
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    • F31 - International Economics - - International Finance - - - Foreign Exchange

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