Fear of appreciation

By Eduardo Levy-Yeyati, Federico Sturzenegger. 2007

296 citations recorded by the source corpus.

In recent years, the term “fear of floating” has been used to describe exchange rate regimes that, while officially flexible, in practice intervene heavily to avoid sudden or large depreciations. However, the data reveals that in most cases (and increasingly so in the 2000s) intervention has been aimed at limiting appreciations rather than depreciations, often motivated by the neo-mercantilist view of a depreciated real exchange rate as protection for domestic industries. As a first step to address the broader question of whether this view delivers on its promise, we examine whether this “fear of appreciation” has a positive impact on growth performance in developing economies. We show that depreciated exchange rates indeed lead to higher growth, but that the effect, rather than through import substitution or export booms as argued by the mercantilist view, works largely through the deepening of domestic savings and capital accumulation.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/9e96ce3630326fbbdddf6e01a3072039edf8bb0f

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Citations in the corpus

• Flexible Inflation Targets, Forex Interventions and Exchange Rate Volatility in Emerging Countries (2012, unknown): “3 Accordingly, during economic booms EMEs also experience " fear of appreciation " given their concerns for their loss of competitiveness (Levy-Yeyati and Sturzenegger, 2007).”
• Doing Growth Diagnostics in Practice: A 'Mindbook' (2008, background): “See for example Rodrik (2007), Levy-Yeyati and Sturzenegger (2007) and Montiel and Serven (2008). many developing countries: Argentina, Brazil, Ecuador and Indonesia all suffered sudden stops in the period analyzed in Figure 22.”
• When and Why Worry About Real Exchange Rate Appreciation? The Missing Link Between Dutch Disease and Growth (2013, background): “Levy-Yeyati and Sturzenegger (2007) point to an alternative channel: An undervalued real exchange rate is associated with lower real wages, leading firms to higher investment, and to higher saving rates to finance them.”
• When Is Foreign Exchange Intervention Effective? Evidence from 33 Countries (2019, unknown): “Thus studies either cover just few countries (such as three countries in the influential study by Dominguez and Frankel, 1993) or have to rely on lower quality data, such as weekly aggregates, or on proxies of actual intervention amounts, such as the change in foreign reserves (e.g., Adler and Tovar”