## Weather Shocks and Exchange Rate Flexibility

_IMF Working Papers, May 13, 2022_

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**Canonical URL:** [Weather Shocks and Exchange Rate Flexibility](https://www.imf.org/en/publications/wp/issues/2022/05/13/weather-shocks-and-exchange-rate-flexibility-517525)

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## Bibliographic details
- Authors: Selim A Elekdag, Maxwell Tuuli
- Published: May 13, 2022
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400207600.001

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### Research question and approach
- Research question: Does greater exchange rate flexibility help an economy’s adjustment to weather shocks?
- Method: Quantify the impact of weather shocks on real per capita GDP growth under fixed (pegged) versus flexible exchange rate regimes.

### Key empirical findings
- Weather shocks are generally detrimental to per capita income growth, but the impact is less severe under flexible exchange rate regimes.
- Medium-term adverse growth impact of a 1 degree Celsius increase in temperature:
  - Under a pegged regime: about –1.4 percentage points on average.
  - Under a flexible regime: –0.6 percentage point.
- Exchange rate flexibility mitigates the initial impact of weather shocks and promotes a faster recovery.

### Mechanisms identified
- Under flexible regimes: depreciation of the nominal exchange rate supports real export growth.
- Under pegged regimes and high public debt: countercyclical fiscal policy may not be effective, contrary to standard theoretical predictions.
- Implication: the effectiveness of stabilization depends on the policy mix and the presence of precautionary fiscal buffers.

### Policy implications and recommendations
- Favor exchange rate flexibility as a tool to reduce the medium-term growth cost of temperature-related weather shocks.
- Strengthen policy coordination:
  - Use exchange rate flexibility to support external adjustment and export growth after weather shocks.
  - Recognize limits to countercyclical fiscal policy under pegged regimes when debt is high; prioritize precautionary (fiscal) buffers and appropriate policy mixes.

*Source: Weather Shocks and Exchange Rate Flexibility, Selim A Elekdag and Maxwell Tuuli, May 13, 2022 (IMF Working Paper).*

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_Source: https://www.imf.org/en/publications/wp/issues/2022/05/13/weather-shocks-and-exchange-rate-flexibility-517525_