Currencies in Turbulence: Exploring the Impact of Natural Disasters on Exchange Rates

August 30, 2024

Preview Citation

Format: Chicago

Anh Thi Ngoc Nguyen, and Ha Nguyen. Currencies in Turbulence: Exploring the Impact of Natural Disasters on Exchange Rates, (USA: International Monetary Fund, 2024) accessed September 14, 2024

Disclaimer: IMF 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.

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.

Subject: Environment, Exchange rate adjustments, Exchange rate arrangements, Exchange rates, Foreign exchange, Natural disasters, Nominal effective exchange rate

Keywords: Exchange rate adjustments, Exchange rate arrangements, Exchange rate movement, Exchange rate reaction, Exchange rate regimes, Exchange rate response, Exchange rate volatility, Exchange rates, Fixed exchange rate regimes, Flexible exchange rate regimes, Global, Natural disaster shock, Natural disasters, Nominal effective exchange rate, Structural changes

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/186
Stock No:

WPIEA2024186
ISBN:

9798400289385
ISSN:

1018-5941

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