IMF Working Papers

Weather Shocks and Exchange Rate Flexibility

By Selim A Elekdag, Maxwell Tuuli

May 13, 2022

Download PDF

Preview Citation

Format: Chicago

Selim A Elekdag, and Maxwell Tuuli. Weather Shocks and Exchange Rate Flexibility, (USA: International Monetary Fund, 2022) accessed December 4, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper assesses the stabilization properties of fixed versus flexible exchange rate regimes and aims to answer this research question: Does greater exchange rate flexibility help an economy’s adjustment to weather shocks? To address this question, the impact of weather shocks on real per capita GDP growth is quantified under the two alternative exchange rate regimes. We find that although weather shocks are generally detrimental to per capita income growth, the impact is less severe under flexible exchange rate regimes. Moreover, the medium-term adverse growth impact of a 1 degree Celsius increase in temperature under a pegged regime is about –1.4 percentage points on average, while under a flexible regime, the impact is less than one half that amount (–0.6 percentage point). This finding bolsters the idea that exchange rate flexibility not only helps mitigate the initial impact of the shock but also promotes a faster recovery. In terms of mechanisms, our findings suggest that the depreciation of the nominal exchange rate under a flexible regime supports real export growth. In contrast to standard theoretical predictions, we find that countercyclical fiscal policy may not be effective under pegged regimes amid high debt, highlighting the importance of the policy mix and precautionary (fiscal) buffers.

Subject: Conventional peg, Emerging and frontier financial markets, Exchange rate adjustments, Exchange rate arrangements, Exchange rate flexibility, Financial markets, Foreign exchange

Keywords: Climate change, Conventional peg, Decline in government expenditure growth, Economic growth, Emerging and frontier financial markets, Exchange rate adjustments, Exchange rate arrangements, Exchange rate flexibility, Exchange rate regimes, Global, Government consumption growth, Growth impact, Peg exchange rate regime, Regime s, Regime window, Temperature shock, Weather shock

Publication Details

  • Pages:

    38

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2022/093

  • Stock No:

    WPIEA2022093

  • ISBN:

    9798400207600

  • ISSN:

    1018-5941