A Model of Macroeconomic Policies with Endogenously Insurable Exchange Rates
IMF Working Papers, September 4, 2026
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- Authors: Suman S Basu, Pablo Winant
- Published: September 4, 2026
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229060561.001
Overview and Research Question
- Authors: Suman S Basu, Pablo Winant
- Publication date: September 4, 2026
- Series: Working Paper No. 2026/188
- Volume: 2026; Issue: 188; Pages: 58
- DOI: https://doi.org/10.5089/9798229060561.001
- Stock No: WPIEA2026188
- ISBN: 9798229060561
- ISSN: 1018-5941
- Subject tags: Currency markets, Exchange rates, External debt, Financial institutions, Financial markets, Foreign exchange, Insurance companies
- Keywords: asymmetric information, delegation of monetary policy, exchange rate distribution, fiscal policy, foreign exchange market, IMF working papers, insurability of exchange rate risks, macroprudential policies, monetary policy, policy framework
Core Model Mechanism
- Proposes a tractable small-open-economy model in which uncovered interest parity premia on foreign exchange (FX) markets arise from the endogenous lack of insurability of exchange rate risks.
- Asymmetric information about monetary policy can make the tails of the exchange rate distribution uninsurable in FX hedging markets.
- Uninsurable tails in hedging markets generate premia in FX spot markets because of the risk aversion of lenders holding the external debt.
- Identifies an "information sensitivity externality": private agents do not internalize that their actions can reduce the insurability of exchange rates, creating a role for government intervention.
Key Findings and Predictions
- Premia may be amplified by weaknesses in:
- monetary policy frameworks,
- fiscal policy frameworks,
- financial policy frameworks.
- Reforms that reduce the sensitivity of exchange rates to private information can reduce premia.
- The constrained efficient policy depends on the composition of external lenders.
- Policy interventions that the model finds potentially effective include:
- delegation of monetary policy to an “aloof central banker”,
- constraints on fiscal policy,
- more active use of macroprudential tools,
- institutions which limit asymmetric information.
Policy Implications and Recommendations
- There is a role for government intervention to address the information sensitivity externality.
- Policy design should consider the composition of external lenders when determining the constrained efficient mix of policies.
- Recommended policy instruments (depending on lender composition and institutional context):
- Monetary policy delegation to reduce information-driven exchange rate sensitivity (e.g., an “aloof central banker”).
- Fiscal rules or constraints to limit fiscal actions that increase exchange rate information sensitivity.
- More active macroprudential regulation to manage financial channels that amplify premia.
- Institutional reforms to limit asymmetric information about monetary policy and improve the insurability of exchange rate risks.
Nature of the Contribution
- Presents a theoretical explanation linking asymmetric information, insurability of exchange rate tails, and uncovered interest parity premia.
- Provides a framework linking macroeconomic policy frameworks and financial market structure to FX premia via insurability considerations.
IMF Working Papers. A Model of Macroeconomic Policies with Endogenously Insurable Exchange Rates, Suman S Basu and Pablo Winant, September 4, 2026.
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