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Call for Papers: PIER Research Workshop 2025
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Discussion Paperdp
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Year
2025
2024
2023
2022
...
26 April 2024
20241714089600000
No. 220

Exchange Rate in Emerging Markets: Shock Absorber or Source of Shock?

Abstract

This paper examines the stabilization role of flexible exchange rates for emerging economies within the Latin America and Asia regions. Based on a structural VAR model, we utilize zero and sign restrictions as well as introduce novel exchange rate pass-through restrictions to identify structural macroeconomic shocks. Overall, we find that exogenous exchange rate shocks drive more than half of total exchange rate fluctuations in emerging economies. Despite this predominant role, we find that exchange rates do not act as a source of shocks to the real economy, but instead absorb and reduce output growth and inflation volatilities. We further find that this shock-insulation property is highly shockdependent, where the benefits of flexible exchange rates are most evident for demand and global shocks, while exchange rate movements tend to amplify output growth volatilities in the face of global supply shocks. Also, based on counterfactual analyses, we find that the net benefits of flexible exchange rates as a shock absorber are in general larger for emerging economies in Latin America than in Asia, particularly during crises periods. Finally, while we find that the stabilization role of exchange rates hinges upon the nature of underlying structural shocks, there is also a positive association with structural determinants such as a country’s degree of exchange rate flexibility and trade openness.

Published Version

Manopimoke, P., Nookhwun, N., & Pattararangrong, J. (2024). Exchange rate in emerging markets: Shock absorber or source of shock? Journal of International Money and Finance, 148, 103148.

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JEL: C32E44F31F41
Tags: flexible exchange rateshock absorberexchange rate pass-throughshock dependencystructural var
The views expressed in this workshop do not necessarily reflect the views of the Puey Ungphakorn Institute for Economic Research or the Bank of Thailand.
Pym Manopimoke
Pym Manopimoke
Bank of Thailand
Nuwat Nookhwun
Nuwat Nookhwun
Puey Ungphakorn Institute for Economic Research
Jettawat Pattararangrong
Jettawat Pattararangrong
Puey Ungphakorn Institute for Economic Research

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