Drivers of Exchange Rates in EMDEs: Implications for Foreign Exchange Intervention

Staff Discussion Notes, September 17, 2026

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Drivers of Exchange Rates in EMDEs: Implications for Foreign Exchange Intervention

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Bibliographic details

• Authors: Ece Ozge Emeksiz, Andres Fernandez, Nikhil Patel, Ivan Petrella, Tatjana Schulze
• Published: September 17, 2026
• Series: Staff Discussion Notes
• DOI: https://doi.org/10.5089/9798229055208.006

Overview

• Purpose: Develops an empirical framework to distinguish exchange rate movements driven by macroeconomic fundamentals from those driven by financial shocks that impair currency market functioning.
• Relevance: Central to the IMF’s Integrated Policy Framework (IPF) and assessing when foreign exchange (FX) intervention may be appropriate to smooth currency risk premia.
• Data scope: Uses 15 years of monthly data from 25 EMDEs.
• Output format: Staff Discussion Note, 45 pages, Staff Discussion Notes No. 2026/003, DOI: https://doi.org/10.5089/9798229055208.006.

Conceptual framework and methodology

• Key diagnostic: Deviations from uncovered interest parity (UIP) are used to capture currency risk premia and limits to arbitrage.
• Toolkit components:
  • Macro‑financial data.
  • Model‑based sign restrictions.
  • Narrative evidence to identify episodes driven by financial shocks rather than fundamentals.
• Application modes:
  • Retrospective analysis.
  • Real‑time implementation for policymakers.

Stylized facts and empirical findings

• UIP premia documented across the sample of 25 EMDEs over 15 years.
• Financial shock–driven episodes:
  • Account for around one third of UIP premium fluctuations.
  • Are associated with sizable contractions in economic activity (magnitude described qualitatively in the note).

Country applications and illustrations

• Case studies: Chile and Brazil.
  • Show that financial shock–driven episodes account for around one third of UIP premium fluctuations in these applications.
  • Demonstrate links between identified financial shock episodes and sizable contractions in economic activity.

Policy implications and practical use

• Interpretation: The framework gives policymakers a structured approach to interpreting exchange rate pressures and distinguishing between fundamental and non‑fundamental drivers.
• FX intervention relevance:
  • Helps assess when FX intervention may be appropriate to smooth currency risk premia arising from financial shocks that impair market functioning.
• Use in the IPF: Provides empirical guidance consistent with the Integrated Policy Framework’s emphasis on diagnosing drivers of exchange rate movements.

Keywords and subjects

• Subjects: Currencies, Currency markets, Exchange rates, Financial markets, Financial services, Foreign exchange, Interest rate parity, Money.
• Keywords: exchange rates, financial shocks, narrative VARs, uncovered interest parity.

Staff Discussion Notes by Ece Ozge Emeksiz, Andres Fernandez, Nikhil Patel, Ivan Petrella, and Tatjana Schulze (September 17, 2026).

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