Destabilizing stability? [electronic resource] : exchange rate arrangements and foreign currency debt / by Balazs Csonto and Tryggvi Gudmundsson.

[Washington, D.C.] : International Monetary Fund, 2020.©2020

Csonto, Balazs. author.

Gudmundsson, Tryggvi. author.

International Monetary Fund. issuing body.

01-01-2020

1 online resource (24 pages).

text

online resource

IMF working paper ; no. 20/173

IMF working paper ; no. 20/173.

WEB (Copy 1) INTRANET 1262573-1001 ONLINE

Open item 

Monetary policy

Foreign exchange markets

Economic models

Overseas item

Statistics

"August 2020"

Includes bibliographical references.

9781513555928

Emerging markets (EMs) often respond to shocks by intervening in foreign exchange (FX) markets and thus preventing full exchange rate adjustment. This response can serve to dampen the effect of shocks and increase monetary policy space but may also incentivize economic participants to increase risk taking and take on more FX debt. This paper empirically analyzes the role of exchange rate flexibility in affecting such risk taking, by using rolling correlations and difference-in-difference estimations. The results suggest that a shift towards greater exchange rate flexibility often coincides with a decline in external FX debt. The findings also highlight the importance of using complementary policies to deal with financial stability issues related to the exchange rate, such as FX-specific macroprudential policies and policies aimed at promoting financial development.

1262573

1262573-1001

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