## A Model of Macroeconomic Policies with Endogenously Insurable Exchange Rates

_IMF Working Papers, September 4, 2026_

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## Bibliographic details
- Authors: Suman S Basu, Pablo Winant
- Published: September 4, 2026
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229060561.001

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### 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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