Currencies in turbulence: exploring the impact of natural disasters on exchange rates

Anh Thi-Ngoc Nguyen and Ha Nguyen

Journal of International Money and Finance, 2025, vol. 157, issue C

Abstract: This paper investigates the impact of disasters caused by natural hazards on exchange rate movements in different country groups with different exchange rate regimes. Using a panel local projection model with a high-frequency monthly dataset of 177 countries during 1970M1–2019M12, we find that exchange rate movements are more sensitive to disasters in emerging markets and developing countries (EMDEs) than in advanced economies (AEs). Furthermore, exchange rate reactions to natural shocks depend on exchange rate regimes adopted by EMDEs. On average, both nominal and real exchange rates could depreciate up to 6 percent two years after the disasters in non-pegged regimes. Our findings suggest that EMDEs with flexible exchange rate regimes could observe a faster recovery through nominal and real depreciations, although they should be mindful about policy implications that may arise from large exchange rate fluctuations caused by disaster shocks.

Keywords: Natural hazards; Disasters; Exchange rates; Exchange rate regimes; Flexible exchange rate regimes; Fixed exchange rate regimes; Local projection model; Hetorogeneity (search for similar items in EconPapers)
Date: 2025
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Working Paper: Currencies in Turbulence: Exploring the Impact of Natural Disasters on Exchange Rates (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:157:y:2025:i:c:s0261560625001329

DOI: 10.1016/j.jimonfin.2025.103397

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