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Weather Shocks and Exchange Rate Flexibility

金融2022-05-13IMF℡***
Weather Shocks and Exchange Rate Flexibility

Weather Shocks and Exchange Rate Flexibility Selim Elekdag and Maxwell Tuuli WP/22/93IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. 2022 MAY * The authors would like to thank Subir Lall for insightful discussions. We would also like to thank participants at the MCDdepartmental seminar series for the helpful discussions and suggestions. We are grateful to Sebastian Acevedo Mejia, ClaudioBaccianti, Mico Mrkaic, Natalija Novta, Evgenia Pugacheva, and Petia Topalova for sharing their dataset. We also benefitted from discussions by Augustus J. Panton, Bas Bakker, Nicolas Fernandez-Arias, K. Naidoo, H. Nguyen, Chadi Abdallah, and SanazSadoughi. The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or itsmanagement.© 2022 International Monetary Fund WP/22/93IMF Working Paper Middle East and Central Asia Department Weather Shocks and Exchange Rate Flexibility Prepared by Selim Elekdag and Maxwell Tuuli* Authorized for distribution by Nicolas R. F. Blancher May 2022IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. ABSTRACT: This paper assesses the stabilization properties of fixed versus flexible exchange rate regimes and aims to answer this research question: Doe s greater exchange rate flexibility help an economy’s adjustment to weather shocks? To address this question, the impact of weather shocks on real per capita GDP growth is quantified under the two alternative exchange rate regimes. We find that although weather shocks are generally detrimental to per capita income growth, the impact is less severe under flexible exchange rate regimes. Moreover, the medium-term adverse growth impact of a 1 degree Celsius increase in temperature under a pegged regime is about –1.4 percentage points on average, while under a flexible regime, the impact is le ss than one half that amount (–0.6 percentage point). This finding bolsters the idea that exchange rate flexibility not only helps mitigate the initial impact of the shock but also promotes a faster recovery. In terms of mechanisms, our findings suggest that the depreciation of the nominal exchange rate under a flexible regime supports real export growth. In contrast to standard theoretical predictions, we find that countercyclical fiscal policy may not be effective under pegged regimes amid high debt, highlighting the importance of the policy mix and precautionary (fiscal) buffers. RECOMMENDED CITATION: Elekdag, S., and Tuuli, M. (2022), Weather Shocks and Exchange Rate Flexibility, IMF Working Paper WP/22/93 , Washington DC: International Monetary Fund. JEL Classification Numbers: F31, F4, O40, O44, Q54, Q56 Keywords: Exchange rate regimes; Economic growth; Climate change Author’s E-Mail Address: SElekdag@imf.org, MTuuli@imf.org IMF WORKING PAPERS Weather Shocks and Exchange Rate Flexibility INTERNATIONAL MONETARY FUND 2 Executive Summary This paper empirically assesses contrasting theoretical predictions about the macroeconomic stabilization properties of fixed and flexible exchange rate regimes by quantifying the impact of weather shocks on per capital real GDP growth. The weather shocks are computed as annual variations in temperature and precipitation. Although climate change has been attributed to human activity (IPCC, 2021), weather shocks are unpredictable and not directly caused by economic decisions, especially those relating to exchange rate policy. To quote a saying attributed to Mark Twain: “Climate is what we expect, weather is what we get.” The results of the paper provide broad support for the notion that greater exchange rate flexibility can help emerging market and developing countries (EMDCs) better adjust to shocks. In particular, fixed exchange rate regimes perform considerably worse when weather shocks occur relative to flexible regimes, on average. For example, a 1 degree Celsius increase in temperature would decrease real per capita income growth by 1.4 percentage points upon impact under a peg, whereas the corresponding decrease under a non-pegged exchange rate regime would be 1 percentage point. Importantly, while the medium-term adverse growth impact under the peg is about –1.4 percentage points on average, under the flexible regimes, this impact is less than one half that amount (–0.6)—and not statistically significant. In other words, greater exchange rate flexibility not only helps mitigate the initial impact of the shock, but also promotes a faster recovery. The underlying adjustment mechanism als

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