Real Exchange Rate Appreciation in Emerging Markets: Can Fiscal Policy Help?
IMF Working Papers, January 10, 2014
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Bibliographic details
- Authors: Marialuz Moreno Badia, Alex Segura-Ubiergo
- Published: January 10, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475523577.001
Summary / Overview
- Several emerging markets have experienced substantial real exchange rate appreciation in recent years, raising competitiveness concerns and prompting policy responses.
- The paper examines whether fiscal policy can alleviate appreciation pressures.
- Sample: 28 emerging market economies over 1983-2011.
- Paper length: 23 pages.
- Series: Working Paper No. 2014/001, Issue: 001, Volume: 2014.
- DOI: https://doi.org/10.5089/9781475523577.001
- ISBN: 9781475523577
- ISSN: 1018-5941
Methodology
- Estimated a dynamic model of the real exchange rate using the sample of 28 emerging market economies over 1983-2011.
- Analyses differentiate between permanent and temporary fiscal adjustments and assess the role of spending composition.
Key Findings
- A permanent fiscal adjustment may reduce real appreciation pressures over the long term.
- The composition of public spending matters: reductions in current spending play a key role in easing appreciation pressures.
- Public investment composition and fiscal discipline interact with exchange rate dynamics and competitiveness outcomes.
Case Study: Brazil
- The paper focuses on Brazil to illustrate the importance of the empirical findings.
- Results for Brazil suggest that maintaining fiscal discipline while increasing public investment is likely to ease real appreciation pressures.
- Emphasizes the importance of tackling long-standing budget rigidities in Brazil.
Policy Implications and Recommendations
- Fiscal policy can be part of the toolkit to address real exchange rate appreciation in emerging markets.
- Policymakers should consider permanent fiscal adjustments rather than solely temporary measures to achieve long-term reductions in appreciation pressures.
- Prioritize reductions in current public spending as an effective composition strategy.
- In countries like Brazil, combine fiscal discipline with targeted increases in public investment while addressing budget rigidities.
Subjects and Keywords (as provided)
- Subjects: Expenditure, Fiscal policy, Foreign exchange, Public investment and public-private partnerships (PPP), Public investment spending, Real exchange rates
- Keywords: a number of emerging markets, appreciation, appreciation pressure, Asia and Pacific, emerging market, fiscal policy, government spending, investment, market GDP, public consumption, public investment, Public investment and public-private partnerships (PPP), Public investment spending, real exchange rate, Real exchange rates, REER appreciation, WP
IMF Working Paper No. 2014/001 (2014), DOI: https://doi.org/10.5089/9781475523577.001
Content in this bundle
- 1. Real Effective Exchange Rate: Long-Run Estimates