The Case for a Managed Float under Inflation Targeting


By Jonathan D. Ostry

(Version in Español)

The global financial crisis has reminded emerging market economies, if they needed reminding, that capital flows can be highly volatile and that crises need not be home grown.

Emerging markets have been affected in a variety of ways, not least by the sharp ups and downs in exchange rates that volatile capital flows engender.

These ups and downs may be less benign in emerging markets than they might be in advanced economies for a number of reasons.

  • First, emerging markets may have more fragile balance sheets—essentially they are less well hedged against currency risk—so depreciations may engender financial distress and even bankruptcies and adverse effects on economic activity.
  • Second, they may be less flexible, so that when the exchange rate strengthens and the traded goods sector loses competitiveness, this may have permanent effects on the economy even if the exchange rate later reverts to its initial level.

Continue reading

Does Foreign Exchange Intervention Slow the Pace of Currency Appreciation?


By Gustavo Adler and Camilo E. Tovar

(Version in Español)

Abundant global liquidity and high exposure to capital movements have put foreign exchange intervention at center stage of the policy debate in Latin America. Although intervention is widely used, there is limited evidence about its effects on the exchange rate, and particularly in terms of slowing the pace of currency appreciation.

In the latest Regional Economic Outlook: Western Hemisphere we took a fresh look at this issue, examining intervention practices and effectiveness for a group of economies in Latin America and other regions during 2004-10. In particular, we sought to answer the following questions:

  • How do Latin American countries intervene and in what respects do they differ from other economies?
  • What are the rationales for these policies?
  • How effective have they been in affecting the exchange rate?  Continue reading
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