{
  "title": "External Shocks, Policies, and Tail-Shifts in Real Exchange Rates",
  "publication": "IMF Working Papers, June 23, 2023",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2023/06/23/external-shocks-policies-and-the-distribution-of-real-exchange-rate-movements-535208",
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  "summary": "We use panel quantile regressions to study extreme (rather than average) movements in the distribution of the real effective exchange rate (REER) of small open economies. We document that global uncertainty (VIX) and global financial conditions (U.S.",
  "sections": [
    {
      "heading": "Methods",
      "content": "- Approach: Panel quantile regressions to study extreme (rather than average) movements in the distribution of the real effective exchange rate (REER) of small open economies.\n- Key shocks analyzed: global uncertainty (VIX) and global financial conditions (U.S. monetary policy)."
    },
    {
      "heading": "Core findings",
      "content": "- Global uncertainty (VIX) and U.S. monetary policy shocks:\n  - Have a strong impact on the distribution of REER changes.\n  - Produce larger impacts in the tails of the REER distribution.\n- Heterogeneous amplification:\n  - Larger tail impacts in economies with shallower FX markets.\n  - Larger tail impacts in economies with lower central bank credibility.\n  - Larger tail impacts in economies with higher credit risk (weaker macro fundamentals).\n- Foreign exchange intervention (FXI):\n  - Partially offsets the impact of global shocks.\n  - Particularly effective in the left tail (large depreciations).\n  - More effective in economies with weaker fundamentals.\n  - More effective when FXI is used sporadically.\n- Capital flow management:\n  - Low effectiveness in preventing large REER movements.\n  - May enable more impactful FXI in the immediate aftermath of shocks."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Strengthen market and institutional fundamentals to reduce extreme REER moves:\n  - Deepen FX markets.\n  - Improve central bank credibility.\n  - Strengthen macro fundamentals (reduce credit risk).\n- Use FXI with caution:\n  - FXI can mitigate large depreciations, especially when used sporadically and in economies with weaker fundamentals.\n  - Overreliance on FXI risks dynamic trade-offs and may exacerbate underlying frictions.\n- Calibrate capital flow management recognizing its limited role in preventing large REER swings but potential to support FXI effectiveness immediately after shocks."
    },
    {
      "heading": "Keywords and subject focus",
      "content": "- Subject: Currency markets; Depreciation; Financial markets; Foreign exchange; Foreign exchange intervention; National accounts; Real effective exchange rates; Real exchange rates.\n- Keywords: capital controls; central bank credibility; Currency markets; Depreciation; external shocks; foreign exchange intervention; FXI effectiveness; Global; IMF working paper 23/129; Real effective exchange rates; Real exchange rates; REER distribution; VIX shock.\n\nSource: IMF Working Papers — \"External Shocks, Policies, and Tail-Shifts in Real Exchange Rates\" by Nicolas E Magud and Samuel Pienknagura (June 23, 2023).\n\n---\n\n Content in this bundle\n\n- Working Paper\n  - Working Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Working Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2023/06/23/external-shocks-policies-and-the-distribution-of-real-exchange-rate-movements-535208"
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    "Authors: Nicolas E Magud, Samuel Pienknagura",
    "Published: June 23, 2023",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9798400247019.001",
    "Approach: Panel quantile regressions to study extreme (rather than average) movements in the distribution of the real effective exchange rate (REER) of small open economies.",
    "Key shocks analyzed: global uncertainty (VIX) and global financial conditions (U.S. monetary policy).",
    "Global uncertainty (VIX) and U.S. monetary policy shocks:",
    "Heterogeneous amplification:",
    "Foreign exchange intervention (FXI):",
    "Capital flow management:",
    "Strengthen market and institutional fundamentals to reduce extreme REER moves:",
    "Use FXI with caution:",
    "Calibrate capital flow management recognizing its limited role in preventing large REER swings but potential to support FXI effectiveness immediately after shocks.",
    "Subject: Currency markets; Depreciation; Financial markets; Foreign exchange; Foreign exchange intervention; National accounts; Real effective exchange rates; Real exchange rates.",
    "Keywords: capital controls; central bank credibility; Currency markets; Depreciation; external shocks; foreign exchange intervention; FXI effectiveness; Global; IMF working paper 23/129; Real effective exchange rates; Real exchange rates; REER distribution; VIX shock.",
    "**Working Paper**"
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