Working Paper: NBER ID: w13842
Authors: Carmen M. Reinhart; Vincent R. Reinhart
Abstract: Over the past decade, policymakers in many emerging market economies have opted to limit fluctuations of the value of their domestic currencies relative to the U.S. dollar. A simple interest-parity relationship is used to identify the potential sources of upward pressure on the value of a foreign exchange rate and to explain the policy options to damp them. The paper then documents the extent to which the accumulation of foreign exchange reserves has been sterilized and provides a comprehensive list of major policy initiatives related to stemming forces that would otherwise appreciate the exchange rate in over one hundred countries. This examination of policy efforts shows that a wide variety of tools are used in the attempt to stem the tide of capital flows.
Keywords: capital inflows; reserve accumulation; exchange rate management
JEL Codes: E0; F0; F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower foreign interest rates (E43) | appreciation of the home currency (F31) |
| improved economic conditions (N12) | reduced default risk (G33) |
| reduced default risk (G33) | upward pressure on the currency (F31) |
| increased global risk appetites (F65) | higher capital inflows (F21) |
| higher capital inflows (F21) | appreciation of the exchange rate (F31) |