## Cataclysms and Currencies: Does the Exchange Rate Regime Matter for Real Shocks?

_IMF Working Papers, April 1, 2005_

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## Bibliographic details
- Authors: Rodney Ramcharan
- Published: April 1, 2005
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451861044.001

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### Summary and research question
- Research question: Does the choice of exchange rate regime affect the way an economy's adjustment to real shocks?
- Method: Exploits the randomness of natural shocks to assess empirically contrasting theoretical predictions about adjustment under different exchange rate regimes.
- Key conceptual tension identified: a tradeoff between faster adjustment under flexible regimes and potentially larger investment responses under fixed regimes.

### Main empirical findings
- Adverse natural shocks are associated with both higher investment and foreign direct investment (FDI) only in developing countries with fixed rate regimes.
- Over a 24-month horizon, growth rebounds earlier in flexible rate regimes.
- In the long run, more adverse shocks are associated with higher growth and investment only in predominantly fixed regimes.
- Conclusion synthesized from evidence: Faster adjustment to real shocks under flexible rate arrangements has merit, but exchange rate variability can impede investment; the benefits from faster adjustment may come at the cost of foregoing long run productivity benefits embodied in the larger investment response in fixed rate regimes.

### Policy implications and tradeoffs (as emphasized by the paper)
- Flexible exchange rate regimes:
  - Potential advantage: earlier growth rebound within a 24-month horizon after adverse real shocks.
  - Potential cost: exchange rate variability may impede investment and FDI responses that support long-run productivity gains.
- Fixed (predominantly fixed) exchange rate regimes:
  - Potential advantage: adverse natural shocks are followed by larger investment and FDI responses in developing countries, and in the long run are associated with higher growth and investment.
  - Potential cost: adjustment to shocks may be slower in the near term compared with flexible regimes.
- Policy tradeoff: Choosing an exchange rate regime involves balancing near-term speed of adjustment against the potential for stronger long-term investment and growth responses following adverse real shocks.

### Scope and metadata (from the publication)
- Pages: 35
- Series: Working Paper No. 2005/085
- Issue: 085
- Volume: 2005
- DOI: https://doi.org/10.5089/9781451861044.001

*Rodney Ramcharan. "Cataclysms and Currencies: Does the Exchange Rate Regime Matter for Real Shocks?", IMF Working Papers 2005, 085 (2005), accessed 9/17/2026, https://doi.org/10.5089/9781451861044.001*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/cataclysms-and-currencies-does-the-exchange-rate-regime-matter-for-real-shocks-18161_