Currencies in Turbulence: Exploring the Impact of Natural Disasters on Exchange Rates
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Summary:
This paper investigates the impact of natural disasters on exchange rate movements in different country groups with different exchange rate regimes. Using a panel local projection model with a high-frequency monthly dataset of 177 countries during 1970M1-2019M12, we find that exchange rate movements are more sensitive to natural disasters in emerging markets and developing countries (EMDEs) than in advanced economies (AEs). Furthermore, exchange rate reactions to natural shocks depend on exchange rate regimes adopted by EMDEs. On average, both nominal and real exchange rates could depreciate up to 6 percents two years after the disasters in non-pegged regimes. Our findings suggest that EMDEs with flexible exchange rate regimes would observe a faster recovery through nominal and real depreciations, although they should be mindful about policy implications that may arise from large exchange rate fluctuations caused by natural disaster shocks.
Series:
Working Paper No. 2024/186
Subject:
Currencies Environment Exchange rate adjustments Exchange rate arrangements Exchange rate flexibility Exchange rates Foreign exchange Money Natural disasters Nominal effective exchange rate Real effective exchange rates Real exchange rates
Frequency:
regular
English
Publication Date:
August 30, 2024
ISBN/ISSN:
9798400289385/1018-5941
Stock No:
WPIEA2024186
Format:
Paper
Pages:
37
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