Exchange Rate Policy (ERP)
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Course overview
- The course gives a comprehensive overview of exchange rate analysis and policy.
- Key concepts covered include: real, nominal, bilateral, multilateral, spot, forward exchange rates; arbitrage conditions such as UIP, law of one price, PPP, relative PPP.
- The course examines the role of the exchange rate in:
- achieving internal and external balance (adjustment to overall equilibrium under floating and fixed exchange rate regimes);
- economic growth (undervaluation, Washington Consensus, the Balassa-Samuelson effect).
- Exchange rate policy regimes and policy mix covered: taxonomy, impossible trinity, monetary policy independence, financial stability, fiscal policy, capital controls.
- Practical problems for developing and emerging market economies addressed: excessive volatility, de jure vs. de facto regimes, competitiveness, price stability, exchange-rate pass-through, targets and instruments.
- Transition issues analyzed: motives for moving from rigid to flexible regimes; speed of transition; requirements such as deep and liquid domestic FX markets, derivatives markets, coherent intervention policy, nominal anchor; transition sequence.
- FX intervention topics: sterilized vs. non-sterilized interventions; motivations, channels, effectiveness, instruments, tactics, policy communication.
- Causes of currency crises and the roles of macroeconomic and prudential policies are discussed.
- Reserve adequacy and external balance assessment tools taught: Assess reserve adequacy (ARA) and conduct an External Balance Assessment (EBA); use of an early warning system to monitor currency crises.
Target audience and qualifications
- Target audience: Junior to mid-level officials who work with exchange rate policy and analysis.
- Qualifications:
- Participants are expected to have an advanced degree in economics or equivalent professional experience.
- Participants are expected to be comfortable with Microsoft Excel and Excel-based applications.
- Participants are expected to have a working knowledge of EViews.
Course objectives (upon completion participants should be able to)
- Assess reserve adequacy with traditional and the IMF ARA metric.
- Assess external balance position with EBA and EBA-lite methodologies.
- Construct systems for early warning of currency crises using data on nominal exchange rates and international reserves.
- Describe the exchange rate regime choice and how country-specific features could influence the choice.
Syllabus and structure
- Syllabus reference: {9499 CFFE-459 C-4258-BB24-F1 A572819 BB1}
- Part I: Introductions to key definitions and concepts used in exchange rate analysis, including real exchange rate misalignment; discussion of how changes in the real exchange rate affect external adjustment and growth.
- Part II: Macroeconomic volatility and capital flows; role of foreign exchange intervention and international reserve adequacy.
- Part III: Macroeconomic policy tradeoffs under different exchange rate regimes; main exchange rate policy challenges in developing and emerging market economies (use of hybrid regimes, forced and unforced exits from pegs, reasons behind Fear-of-Floating).
- Part IV: Real exchange rate equilibrium and misalignment; application of the External Balance Assessment (EBA) methodology.
- Final segment: Currency crises and the Early Warning System; participants' presentations.
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