{
  "title": "Drivers of Exchange Rates in EMDEs: Implications for Foreign Exchange Intervention",
  "publication": "Staff Discussion Notes, September 17, 2026",
  "sourceUrl": "https://www.imf.org/en/publications/staff-discussion-notes/issues/2026/09/16/drivers-of-exchange-rates-in-emdes-implications-for-foreign-exchange-intervention-578715",
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  "summary": "Exchange rate movements in emerging market and developing economies (EMDEs) can reflect shifts in macroeconomic fundamentals or, alternatively, financial shocks that impair currency market functioning.",
  "authors": [
    "Ece Ozge Emeksiz",
    "Andres Fernandez",
    "Nikhil Patel",
    "Ivan Petrella",
    "Tatjana Schulze"
  ],
  "publishDate": "2026-09-17",
  "series": "Staff Discussion Notes",
  "sections": [
    {
      "heading": "Overview",
      "content": "- 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.\n- 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.\n- Data scope: Uses 15 years of monthly data from 25 EMDEs.\n- Output format: Staff Discussion Note, 45 pages, Staff Discussion Notes No. 2026/003, DOI: https://doi.org/10.5089/9798229055208.006."
    },
    {
      "heading": "Conceptual framework and methodology",
      "content": "- Key diagnostic: Deviations from uncovered interest parity (UIP) are used to capture currency risk premia and limits to arbitrage.\n- Toolkit components:\n  - Macro‑financial data.\n  - Model‑based sign restrictions.\n  - Narrative evidence to identify episodes driven by financial shocks rather than fundamentals.\n- Application modes:\n  - Retrospective analysis.\n  - Real‑time implementation for policymakers."
    },
    {
      "heading": "Stylized facts and empirical findings",
      "content": "- UIP premia documented across the sample of 25 EMDEs over 15 years.\n- Financial shock–driven episodes:\n  - Account for around one third of UIP premium fluctuations.\n  - Are associated with sizable contractions in economic activity (magnitude described qualitatively in the note)."
    },
    {
      "heading": "Country applications and illustrations",
      "content": "- Case studies: Chile and Brazil.\n  - Show that financial shock–driven episodes account for around one third of UIP premium fluctuations in these applications.\n  - Demonstrate links between identified financial shock episodes and sizable contractions in economic activity."
    },
    {
      "heading": "Policy implications and practical use",
      "content": "- Interpretation: The framework gives policymakers a structured approach to interpreting exchange rate pressures and distinguishing between fundamental and non‑fundamental drivers.\n- FX intervention relevance:\n  - Helps assess when FX intervention may be appropriate to smooth currency risk premia arising from financial shocks that impair market functioning.\n- Use in the IPF: Provides empirical guidance consistent with the Integrated Policy Framework’s emphasis on diagnosing drivers of exchange rate movements."
    },
    {
      "heading": "Keywords and subjects",
      "content": "- Subjects: Currencies, Currency markets, Exchange rates, Financial markets, Financial services, Foreign exchange, Interest rate parity, Money.\n- Keywords: exchange rates, financial shocks, narrative VARs, uncovered interest parity.\n\nStaff Discussion Notes by Ece Ozge Emeksiz, Andres Fernandez, Nikhil Patel, Ivan Petrella, and Tatjana Schulze (September 17, 2026).\n\n---\n\n Content in this bundle\n\n- Staff Discussion Note\n  - Staff Discussion Note (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Staff Discussion Note (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/staff-discussion-notes/issues/2026/09/16/drivers-of-exchange-rates-in-emdes-implications-for-foreign-exchange-intervention-578715"
    }
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    "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",
    "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.",
    "Key diagnostic: Deviations from uncovered interest parity (UIP) are used to capture currency risk premia and limits to arbitrage.",
    "Toolkit components:",
    "Application modes:",
    "UIP premia documented across the sample of 25 EMDEs over 15 years.",
    "Financial shock–driven episodes:",
    "Case studies: Chile and Brazil.",
    "Interpretation: The framework gives policymakers a structured approach to interpreting exchange rate pressures and distinguishing between fundamental and non‑fundamental drivers.",
    "FX intervention relevance:",
    "Use in the IPF: Provides empirical guidance consistent with the Integrated Policy Framework’s emphasis on diagnosing drivers of exchange rate movements.",
    "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 Note**"
  ],
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