Should We Fear Foreign Exchange Depreciation?

4 Pages Posted: 17 Sep 2018 Last revised: 29 Mar 2019

See all articles by Norman Loayza

Norman Loayza

World Bank - Research Department

Fabian Mendez Ramos

Development Research Group, The World Bank

Date Written: October 1, 2016

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: International Trade and Trade Rules, Macroeconomic Management, Bankruptcy and Resolution of Financial Distress, Commodity Risk Management

Suggested Citation

Loayza, Norman and Mendez Ramos, Fabian, Should We Fear Foreign Exchange Depreciation? (October 1, 2016). World Bank Research and Policy Briefs No. 109374. Available at SSRN: https://ssrn.com/abstract=3249554

Norman Loayza (Contact Author)

World Bank - Research Department ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Fabian Mendez Ramos

Development Research Group, The World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States
2022038490 (Phone)

HOME PAGE: http://www.worldbank.org

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