Real Exchange Rate Appreciation in Emerging Markets: Can Fiscal Policy Help?

Author/Editor:

Marialuz Moreno Badia ; Alex Segura-Ubiergo

Publication Date:

January 10, 2014

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

A number of emerging markets have experienced substantial real exchange rate appreciation in recent years, generating concerns about competitiveness and prompting policymakers to respond with a combination of mitigating policies. This paper shows that fiscal policy can play a role in alleviating these pressures. Using a sample of 28 emerging market economies over 1983-2011, we estimate a dynamic model of the real exchange rate and find that a permanent fiscal adjustment may reduce appreciation pressures over the long term. Furthermore, the composition of public spending matters, with reductions in current spending playing a key role. To illustrate the importance of these findings, the paper focuses on the case of Brazil. Our results suggest that maintaining fiscal discipline while increasing public investment in Brazil is likely to ease real appreciation pressures, highlighting the importance of tackling long-standing budget rigidities.

Series:

Working Paper No. 2014/001

Subject:

Expenditure Fiscal policy Foreign exchange Public investment and public-private partnerships (PPP) Public investment spending Real exchange rates

English

Publication Date:

January 10, 2014

ISBN/ISSN:

9781475523577/1018-5941

Stock No:

WPIEA2014001

Pages:

23

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