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Real Exchange Rate Appreciation in Emerging Markets; Can Fiscal Policy Help?

Marialuz Moreno Badia and Alex Segura-Ubiergo ()

No 14/1, IMF Working Papers from International Monetary Fund

Abstract: A number of emerging markets have experienced substantial real exchange rate appreciation in recent years, generating concerns about competitiveness and prompting policymakers to respond with a combination of mitigating policies. This paper shows that fiscal policy can play a role in alleviating these pressures. Using a sample of 28 emerging market economies over 1983-2011, we estimate a dynamic model of the real exchange rate and find that a permanent fiscal adjustment may reduce appreciation pressures over the long term. Furthermore, the composition of public spending matters, with reductions in current spending playing a key role. To illustrate the importance of these findings, the paper focuses on the case of Brazil. Our results suggest that maintaining fiscal discipline while increasing public investment in Brazil is likely to ease real appreciation pressures, highlighting the importance of tackling long-standing budget rigidities.

Keywords: Economic models; Emerging markets; Exchange rate appreciation; Brazil; Foreign exchange; Fiscal policy; Public investment; Real effective exchange rates; real exchange rate, public consumption, exchange rate, effective exchange rate, exchange rates, Open Economy Macroeconomics, (search for similar items in EconPapers)
Pages: 23
Date: 2014-01-10
New Economics Papers: this item is included in nep-opm
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