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Fear of Appreciation

  • Eduardo Levy Yeyati and Federico Sturzenegger

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 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.

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Paper provided by Universidad Torcuato Di Tella in its series Business School Working Papers with number fearapp.

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Length: 40 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:udt:wpbsdt:fearapp
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  1. Andrew K. Rose, 2006. "A Stable International Monetary System Emerges: Inflation Targeting is Bretton Woods, Reversed," NBER Working Papers 12711, National Bureau of Economic Research, Inc.
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  12. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring.
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  30. Glüzmann, Pablo Alfredo & Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2012. "Exchange rate undervaluation and economic growth: Díaz Alejandro (1965) revisited," Economics Letters, Elsevier, vol. 117(3), pages 666-672.
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