Cataclysms and Currencies: Does the Exchange Rate Regime Matter for Real Shocks?
IMF Working Papers, April 1, 2005
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Bibliographic details
- Authors: Rodney Ramcharan
- Published: April 1, 2005
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451861044.001
Summary and research question
- Research question: Does the choice of exchange rate regime affect the way an economy's adjustment to real shocks?
- Method: Exploits the randomness of natural shocks to assess empirically contrasting theoretical predictions about adjustment under different exchange rate regimes.
- Key conceptual tension identified: a tradeoff between faster adjustment under flexible regimes and potentially larger investment responses under fixed regimes.
Main empirical findings
- Adverse natural shocks are associated with both higher investment and foreign direct investment (FDI) only in developing countries with fixed rate regimes.
- Over a 24-month horizon, growth rebounds earlier in flexible rate regimes.
- In the long run, more adverse shocks are associated with higher growth and investment only in predominantly fixed regimes.
- Conclusion synthesized from evidence: Faster adjustment to real shocks under flexible rate arrangements has merit, but exchange rate variability can impede investment; the benefits from faster adjustment may come at the cost of foregoing long run productivity benefits embodied in the larger investment response in fixed rate regimes.
Policy implications and tradeoffs (as emphasized by the paper)
- Flexible exchange rate regimes:
- Potential advantage: earlier growth rebound within a 24-month horizon after adverse real shocks.
- Potential cost: exchange rate variability may impede investment and FDI responses that support long-run productivity gains.
- Fixed (predominantly fixed) exchange rate regimes:
- Potential advantage: adverse natural shocks are followed by larger investment and FDI responses in developing countries, and in the long run are associated with higher growth and investment.
- Potential cost: adjustment to shocks may be slower in the near term compared with flexible regimes.
- Policy tradeoff: Choosing an exchange rate regime involves balancing near-term speed of adjustment against the potential for stronger long-term investment and growth responses following adverse real shocks.
Scope and metadata (from the publication)
- Pages: 35
- Series: Working Paper No. 2005/085
- Issue: 085
- Volume: 2005
- DOI: https://doi.org/10.5089/9781451861044.001
Rodney Ramcharan. "Cataclysms and Currencies: Does the Exchange Rate Regime Matter for Real Shocks?", IMF Working Papers 2005, 085 (2005), accessed 9/17/2026, https://doi.org/10.5089/9781451861044.001