Currencies in Turbulence: Exploring the Impact of Natural Disasters on Exchange Rates

Anh Thi Ngoc Nguyen and Ha Nguyen

No 2024/186, IMF Working Papers from International Monetary Fund

Abstract: This paper investigates the impact of natural disasters 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 natural 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 percents two years after the disasters in non-pegged regimes. Our findings suggest that EMDEs with flexible exchange rate regimes would 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 natural disaster shocks.

Keywords: Natural disasters; exchange rates; exchange rate regimes; flexible exchange rate regimes; fixed exchange rate regimes; structural changes; exchange rate movement; exchange rate reaction; natural disaster shock; exchange rate volatility; exchange rate response; Exchange rate arrangements; Nominal effective exchange rate; Exchange rate adjustments; Global (search for similar items in EconPapers)
Pages: 37
Date: 2024-08-30
New Economics Papers: this item is included in nep-mon and nep-opm
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