Should We Fear Foreign Exchange Depreciation?

Norman Loayza () and Fabian Mendez-Ramos
Authors registered in the RePEc Author Service: Fabian Mendez Ramos

No 109374, Research and Policy Briefs from The World Bank

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.

Keywords: Economic Growth; Currency Crises; Depreciation; Currency Collapses; Systemic Crises; Macroeconomics and Growth (search for similar items in EconPapers)
Pages: 4 pages
Date: 2016-10
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Citations: View citations in EconPapers (1)

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