Exchange Rates during the Crisis

Nearly two years after the onset of the financial crises, many central banks have brought their policy interest rates down to, or close to zero. Various governments have seen their budget deficits soar. Both policies have affected exchange rates, partly through market expectations. With a majority of exchange rates officially floating, exchange rate movements do not necessarily reflect official decisions as was the case in the 1930s. Yet, also in the 2008 crisis, authorities have directly intervened in the foreign exchange market, sometimes in order to defend a falling currency but in other instances with the aim to limit appreciation pressure, akin of competitive devaluations. This paper documents the exchange rate interventions during the height of the 2008/09 financial crisis and identifies the countries which have particular high incentives to intervene in the foreign exchange market to competitively devalue their currency. While various countries had increased incentives to devalue, we find that direct exchange rate interventions have been rather limited and contagion of devaluation has been restricted to one regionally contained case. However, sharp market-driven exchange rate movements have reshaped competitive positions. It appears that these movements have so far not seriously disrupted global trade. After all, a world crisis is likely to require widespread exchange rate adjustments as different countries are affected in different ways and have different capacities to weather the shocks.

Bibliographic Details

Main Authors:	Weber, Sebastian, Wyplosz, Charles
Language:	English
Published:	2009-09-01
Subjects:	BANKING SYSTEMS, BLACK MARKETS, BUDGET DEFICITS, BUFFER, CAPITAL ACCOUNT, CAPITAL CONTROLS, CAPITAL FLIGHT, CAPITAL MOVEMENTS, CAPITAL OUTFLOW, CENTRAL BANK, CENTRAL BANK POLICY, CENTRAL BANKS, COMMODITY, COMPETITIVE DEVALUATIONS, COMPETITIVE EXCHANGE RATE, COMPETITIVE EXCHANGE RATES, COMPETITIVENESS, COMPLEX INSTRUMENT, CONVENTIONAL INSTRUMENT, CREDIT EXPANSION, CREDIT FACILITY, CURRENCY, CURRENCY EARNINGS, CURRENCY PEG, CURRENT ACCOUNT, CURRENT ACCOUNT BALANCE, CURRENT ACCOUNT DEFICIT, CURRENT ACCOUNT DEFICITS, CURRENT ACCOUNT POSITION, CURRENT ACCOUNT SURPLUS, CURRENT ACCOUNT SURPLUSES, DEBT BURDENS, DEBT INTEREST, DEBT LEVEL, DEBT LEVELS, DEBT RATIO, DEBTS, DEFLATION, DEMAND FOR CREDIT, DEPRECIATION, DEPRECIATIONS, DEPRESSION, DEPRESSIONS, DEVALUATION, DEVELOPING COUNTRIES, DISINFLATION, DISTRIBUTIONAL EFFECTS, DOMESTIC BANKING, DOMESTIC CONSUMPTION, ECONOMETRIC ESTIMATES, ECONOMIC FORECASTING, ECONOMIC OUTLOOK, EFFECTIVE EXCHANGE RATE, ELASTICITY, EMERGING MARKETS, EMERGING-MARKET, EQUILIBRIUM, EQUILIBRIUM LEVELS, EQUITY INVESTMENT, EURO ZONE, EXCHANGE RATE, EXCHANGE RATE ARRANGEMENTS, EXCHANGE RATE BAND, EXCHANGE RATE DEVALUATIONS, EXCHANGE RATE FLOATS, EXCHANGE RATE FLUCTUATIONS, EXCHANGE RATE INTERVENTION, EXCHANGE RATE INTERVENTIONS, EXCHANGE RATE MISALIGNMENT, EXCHANGE RATE MOVEMENTS, EXCHANGE RATE POLICIES, EXCHANGE RATE POLICY, EXCHANGE RATE REGIMES, EXCHANGE RATE STABILITY, EXCHANGE RATES, EXPANSIONARY FISCAL POLICY, EXPANSIONARY POLICIES, EXPENDITURES, EXPLICIT EXCHANGE RATE, EXPORT GOODS, EXPORT MARKET, EXPORT MARKETS, EXPORT REVENUES, EXPORTER, EXPORTERS, EXTERNAL BALANCE, EXTERNAL COMPETITIVENESS, EXTERNAL POSITION, EXTERNAL POSITIONS, EXTERNAL TRADE, FINANCIAL ARCHITECTURE, FINANCIAL CAPITAL, FINANCIAL CENTRE, FINANCIAL CRISES, FINANCIAL CRISIS, FINANCIAL MARKET, FINANCIAL MARKETS, FINANCIAL SECTOR, FINANCIAL SYSTEMS, FISCAL POLICIES, FISCAL POLICY, FIXED EXCHANGE RATES, FLEXIBLE EXCHANGE RATE, FLEXIBLE EXCHANGE RATE REGIME, FLEXIBLE EXCHANGE RATES, FLOATER, FOREIGN ASSET, FOREIGN ASSET POSITION, FOREIGN ASSETS, FOREIGN BORROWING, FOREIGN CURRENCY, FOREIGN CURRENCY DEBT, FOREIGN CURRENCY REVENUES, FOREIGN EXCHANGE, FOREIGN EXCHANGE MARKET, FOREIGN EXCHANGE RESERVES, FOREIGN LIABILITIES, FOREIGN LIABILITY, FOREIGN RESERVES, GLOBAL CURRENT ACCOUNT IMBALANCES, GLOBAL IMBALANCES, GLOBAL OUTPUT, GLOBAL TRADE, GOLD, GOLD STANDARD, GOVERNMENT CONSUMPTION, GROWTH RATE, HIGH INFLATION, HISTORY OF EXCHANGE RATE, HOLDING, IMPORTS, INDUSTRIAL COUNTRIES, INFLATION, INFLATION FORECASTS, INFLATION RATE, INFLATION RATES, INSTRUMENT, INTEREST RATE, INTEREST RATE DIFFERENTIALS, INTEREST RATES, INTERNATIONAL BANK, INTERNATIONAL INVESTORS, INTERNATIONAL MONETARY SYSTEM, INTERNATIONAL MONEY, INTERNATIONAL TRADE, LIQUIDATION, LIQUIDITY, LOCAL CURRENCY, LOSS OF COMPETITIVENESS, MACROECONOMIC POLICY, MARKET COMPETITION, MARKET COUNTRIES, MARKET EXPECTATIONS, MARKET FORCES, MARKET PRESSURE, MARKET SHARE, MISALIGNMENTS, MONETARY EXPANSION, MONETARY POLICIES, MONETARY POLICY, NOMINAL EXCHANGE RATE, NOMINAL EXCHANGE RATES, NOMINAL INTEREST RATE, OPEN ECONOMIES, OUTPUT, OUTPUT DECLINE, OVERVALUATION, PEG, POLICY RESPONSES, POLITICAL CONSIDERATIONS, POLITICAL ECONOMY, POSITIVE EXTERNALITIES, POVERTY REDUCTION, PROTECTIONISM, PUBLIC DEBT, REAL EXCHANGE RATE, REAL EXCHANGE RATE MISALIGNMENTS, REAL EXCHANGE RATES, REAL INTEREST, REAL INTEREST RATES, RECESSION, REPAYMENT, RESERVE, ROBUSTNESS CHECK, SEIZURE, SLOWDOWN, SMALL COUNTRIES, STANDARD DEVIATIONS, SURPLUS COUNTRIES, SURPLUSES, TOTAL EXPORTS, TOTAL OUTPUT, TRADABLE GOOD, TRADE BALANCE, TRADE PATTERN, TRADE PATTERNS, TRADE PROTECTION, TRADE SHARES, TRADE SURPLUSES, TRADING, TRADING PARTNERS, TRANSACTION, UNCERTAINTY, VOLATILITY, VOLATILITY IN EXCHANGE RATE, WEIGHTS, WORLD MARKET,
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20090921124246 https://hdl.handle.net/10986/4250
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