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Abstract We analyze the optimal intervention policy for an emerging market central bank that wishes to stabilize the exchange rate during a capital outflow episode, but possesses limited reserves. We [...]

The workhorse open economy macromodel suggests that capital inflows are contractionary because they appreciate the currency and reduce net exports. Emerging market policy makers, however, believe that inflows lead to credit booms and rising output, and the evidence appears to go their way. To reconcile theory and reality, we extend the set of assets included in the Mundell-Fleming model to include both bonds and non-bonds. At a given policy rate, inflows may decrease the rate on nonbonds, reducing the cost of financial intermediation, potentially offsetting the contractionary impact of appreciation. We explore the implications theoretically and empirically and find support for the key predictions in the data. [JEL F31, F32] doi:10.1057/s41308-017-0039-z; published online 23 August 2017, I. Introduction Are capital inflows expansionary or contractionary? One would think that the question was settled long ago. But, in fact, it is not. And there is a striking schizophrenia. [...]

Why have emerging market economies (EMEs) been stockpiling international reserves? We find that motives have varied over time; vulnerability to current account shocks was relatively important in the 1980s but, as EMEs became more financially integrated, factors related to the magnitude of potential capital outflows gained importance. Reserve accumulation as a by-product of undervalued currencies has also become more important since the Asian crisis. Correspondingly, using quantile regressions, we find that the reason for holding reserves varies according to the country's position in the global reserves distribution. High-reserve holders, who tend to be more financially integrated, are motivated by insurance against capital account rather than current account shocks and are more sensitive to the cost of holding reserves than are low-reserve holders. Currency undervaluation is a significant determinant across the reserves distribution, albeit for different reasons. [JEL E58, F15, F31, F43] IMF Economic Review (2017) 65, 308-364. doi:10.1057/s41 308-016-0003-3; published online 14 December 2016, Introduction Over the past few decades, despite greater exchange rate flexibility, the more advanced developing countries--emerging market economies (EMEs)--have been accumulating large stocks of international reserves. Reserve holdings, which averaged [...]

This paper revisits the bipolar prescription for exchange rate regime choice and asks two questions: Are the poles of hard pegs and pure floats still safer than the middle? And where to draw the line between safe floats and risky intermediate regimes? Our findings, based on a sample of 50 emerging market economies over 1980-2011, show that macroeconomic and financial vulnerabilities are significantly greater under less flexible exchange rate regimes--including hard pegs --as compared with floats. Although not especially susceptible to banking or currency crises, hard pegs are significantly more prone to growth collapses, suggesting that the security of the hard end of the prescription is largely illusory. Intermediate regimes as a class are the most susceptible to crises, but 'managed floats'--a subclass within such regimes--behave much more like pure floats, with significantly lower risks and fewer crises. 'Managed floating, ' however, is a nebulous concept; a characterization of more crisis-prone regimes suggests no simple dividing line between safe floats and risky intermediate regimes. [JEL F31, F33] doi:10.1057/imfer.2014.29, Whatever exchange rate system a country has, it will wish at some times that it had another one. Stanley Fischer (1999) The choice of exchange rate regime is a perennial [...]

Agrowing number of emerging market and developing economies (EMDCs) de facto peg their currencies to maintain price and exchange rate stability--intervening in the foreign exchange markets as necessary, but without [...]

How should emerging market countries handle surges in capital inflows that may pose both prudential and macroeconomic policy challenges? we review the arguments on the appropriate management of inflow surges and discuss the conditions under which controls on capital inflows may be appropriate. we argue that if the economy is operating near potential, if reserves are adequate, if the exchange rate is not undervalued, and if the flows are likely to be transitory, then controls on capital inflows--together with macroeconomic policy adjustment and prudential measures--may usefully form part of the policy toolkit. [JEL F21, F32] IMF economic review (2011) 59, 562-580. doi:10.1057/imfer.201l.15., With the global economy beginning to emerge from the financial crisis, capital is flowing back to emerging market economies (EMEs). These flows, and capital mobility more generally, bring important benefits, [...]

This paper presents two approaches to modeling the use of IMF resources from the General Resources Account in order to gauge whether the recent decline in credit outstanding is a temporary or a permanent phenomenon. The two approaches--the time-series behavior of credit outstanding and a two-stage program selection and access model--yield the same conclusion: the use of IMF resources is likely to decline sharply. Specifically, credit outstanding is projected to decline from an average of SDR 50 billion over 2000-05 to an average of about SDR 8 billion over 2006-10. Stochastic simulations suggest that it is unlikely to be much higher. These results are based on the IMF's World Economic Outlook projections with a correction for historically observed overoptimistic biases. In addition, alternative scenarios assuming weaker economic performance or a less benign global economic environment do not materially alter these results. [JEL F00, F33, F34, F42] IMF Staff Papers (2008) 55, 1-49; doi:10.1057/palgrave.imfsp.9450031, The recent decline in outstanding IMF resources raises the question of whether this is a temporary phenomenon--perhaps reflecting an exceptionally benign global environment--or a more permament shift in the use [...]

Sharp exchange rate depreciations in the East Asian crisis countries (Indonesia, Korea, and Thailand) raised doubts about the efficacy of increasing interest rates to defend the currency. Using a standard monetary model of exchange rate determination, this paper shows that tighter monetary policy was in fact associated with an appreciation of the exchange rate in these countries and during the Mexican currency crisis. Moreover, there is little evidence of higher real interest rates contributing to a widening of the risk premium. [JEL F31, G15, E40], ********** Atish Ghosh (*) One of the more controversial elements of the stabilization programs in the East Asian crisis countries (Indonesia, Korea, and Thailand) was the stance of monetary policy. [...]

Uncertainty about the export earnings accruing to a country (sometimes referred to as export instability) is an important source of macroeconomic uncertainty in many developing countries. Theory predicts that countries should react to increases in this form of uncertainty by increasing their level of savings. The resulting asset accumulations would then act as the country's insurance against the greater riskiness in its income stream. This paper tests this implication for a large sample of developing countries. In general, the results suggest that developing countries have indeed responded to increases in export instability by building up precautionary savings balances., EXPORT INSTABILITY--uncertainty about the export earnings accruing to a country (which empirically arises mainly from price or terms of trade uncertainty rather than uncertainty about export volumes)--is an important source [...]

While few doubt that very high inflation is bad for growth, there is less agreement about the effects of moderate inflation. Using panel regressions and allowing for a nonlinear specification, this paper finds a statistically and economically significant negative relationship between inflation and growth, which holds robustly at all but the lowest inflation rates. A 'decision-tree' technique identifies inflation as one of the most important determinants of growth. Finally, short-run growth costs of disinflation are only relevant for the most severe disinflations, or when the initial inflation rate is well within the single-digit range., Rapid output growth and low inflation are the most common objectives of macroeconomic policy. It is rather surprising, therefore, that a consensus about the relationship between these two variables is [...]