Balance of Payments Anti-Crises
IMF Working Papers, June 1, 2009
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Bibliographic details
- Authors: Isabel K. Yan, Michael Kumhof
- Published: June 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451872811.001
Summary
- Several emerging economies have, until recently, experienced large government surpluses and accelerating foreign exchange reserve accumulation.
- These episodes have been accompanied by economic booms, exchange rate appreciations and in some cases increases in domestic inflation.
- The paper shows that one way to understand these episodes is as manifestations of balance of payments anti-crises, reflecting the perception that the government intends to discontinue its accumulation of reserves in the near future.
- The end-phase of such crises is characterized by nominal interest rates approaching their zero lower bound in accelerating fashion and, if the government targets CPI inflation, by fast increasing domestic inflation.
Key findings and dynamics
- Balance of payments anti-crises can arise when agents perceive that the government will stop accumulating foreign exchange reserves.
- Associated macroeconomic patterns documented:
- Large government surpluses.
- Accelerating foreign exchange reserve accumulation.
- Economic booms.
- Exchange rate appreciations.
- In some cases, increases in domestic inflation.
- End-phase characteristics:
- Nominal interest rates approach the zero lower bound in accelerating fashion.
- If the government targets CPI inflation, domestic inflation rises quickly.
Policy-relevant concepts and mechanisms
- Central role of government reserve accumulation behavior in driving exchange rate and inflation dynamics.
- Interaction between:
- CPI inflation targeting by the government.
- Reserve accumulation and perceived discontinuation of that accumulation.
- Nominal interest rates moving toward the zero lower bound.
- Relevant policy variables and topics listed:
- Central banks
- Exchange rates and exchange rate targeting
- Foreign exchange and foreign exchange reserves
- Inflation and inflation targeting
- International reserves
- Monetary policy
- Prices and price level dynamics
- Rate of exchange rate depreciation
- Reserves accumulation
Publication and metadata
- Authors: Isabel K. Yan, Michael Kumhof
- Publication date: June 1, 2009
- Series: Working Paper No. 2009/134
- Issue: 134
- Volume: 2009
- Pages: 22
- DOI: https://doi.org/10.5089/9781451872811.001
- Stock No: WPIEA2009134
- ISBN: 9781451872811
- ISSN: 1018-5941
- Subjects: Central banks; Exchange rates; Foreign exchange; Inflation; Inflation targeting; International reserves; Monetary policy; Prices; Reserves accumulation; Zero lower bound
- Keywords: Balance of payments anti-crises; central bank; CPI inflation targeting; exchange rate appreciation; exchange rate targeting; Exchange rates; foreign exchange; foreign exchange reserves; Global; Inflation; inflation dynamics; Inflation targeting; International reserves; price level; rate of exchange rate depreciation; Reserves accumulation; WP
Source: Balance of Payments Anti-Crises, IMF Working Paper No. 2009/134, Isabel K. Yan and Michael Kumhof.