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.
Summary: | 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. |
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