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Should We Fear Foreign Exchange Depreciation?

Author

Listed:
  • Norman Loayza
  • Fabian Mendez-Ramos

Abstract

Moderate and gradual changes of the real exchange rate are beneficial for the economy to help it attain domestic and external equilibrium. They should not be feared. However, large and sharp devaluations can lead to insolvency and even systemic crisis. They should be prevented by macroprudential policies and by avoiding unsustainable fixed exchange rate regimes. Central bank intervention to avoid a secular depreciation is useless: it only leads to massive losses of foreign reserves. This brief considers the main stylized facts on foreign exchange rates, with particular focus on developing countries; it examines the reasons and evidence for both potentially negative and positive effects of real exchange rate (RER) depreciation; and it discusses whether policies can be effective in reversing depreciation or mitigating its negative impact.

Suggested Citation

  • Norman Loayza & Fabian Mendez-Ramos, 2016. "Should We Fear Foreign Exchange Depreciation?," Research and Policy Briefs 109374, The World Bank.
    • Handle: RePEc:wbk:wbkrpb:109374
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    Cited by:

    1. Abdallah, Ali, 2022. "Dépréciation réelle de la monnaie et croissance économique [Can real currency depreciation lead growth?]," MPRA Paper 113183, University Library of Munich, Germany.

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