Foreign Exchange Constraint and Developing Economies

Abstract

This chapter focuses on the foreign exchange constraint and capital markets across eight countries in the Caucasus and Central Asia region. Domestic macroeconomic idiosyncrasies and a host of external factors of capital flows volatility and currency pressures characterize much of the recent experience in the region. The chapter provides a detailed review of each economy’s capital markets structure, focusing on sovereign debt, local exchange pressures, and relevant policy questions. As a conceptual outcome, the chapter constructs an analytical framework aiding in assessment of the small open economy’s resilience in facing challenges of foreign exchange constraint, access to global capital markets, exchange rate management, mismatching macroeconomic diversification and development priorities. As such, this chapter attempts to provide a holistic foundation for any subsequent critical examination of the pertinent policy and research problems around foreign exchange constraint and developing economies beyond the immediate regional focus.

Keywords: capital markets, Caucasus and Central Asia, development, foreign exchange constraint, open economy resilience.

JEL Classification: F3, H6, O1