Publication: Exchange Rates during the Crisis
Loading...
Published
2009-09-01
ISSN
Date
2012-03-19
Author(s)
Editor(s)
Abstract
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.
Link to Data Set
Citation
“Weber, Sebastian; Wyplosz, Charles. 2009. Exchange Rates during the Crisis. Policy Research working paper ; no. WPS 5059. © World Bank. http://hdl.handle.net/10986/4250 License: CC BY 3.0 IGO.”
Digital Object Identifier
Associated URLs
Associated content
Other publications in this report series
Publication The Macroeconomic Implications of Climate Change Impacts and Adaptation Options(Washington, DC: World Bank, 2025-05-29)Estimating the macroeconomic implications of climate change impacts and adaptation options is a topic of intense research. This paper presents a framework in the World Bank's macrostructural model to assess climate-related damages. This approach has been used in many Country Climate and Development Reports, a World Bank diagnostic that identifies priorities to ensure continued development in spite of climate change and climate policy objectives. The methodology captures a set of impact channels through which climate change affects the economy by (1) connecting a set of biophysical models to the macroeconomic model and (2) exploring a set of development and climate scenarios. The paper summarizes the results for five countries, highlighting the sources and magnitudes of their vulnerability --- with estimated gross domestic product losses in 2050 exceeding 10 percent of gross domestic product in some countries and scenarios, although only a small set of impact channels is included. The paper also presents estimates of the macroeconomic gains from sector-level adaptation interventions, considering their upfront costs and avoided climate impacts and finding significant net gross domestic product gains from adaptation opportunities identified in the Country Climate and Development Reports. Finally, the paper discusses the limits of current modeling approaches, and their complementarity with empirical approaches based on historical data series. The integrated modeling approach proposed in this paper can inform policymakers as they make proactive decisions on climate change adaptation and resilience.Publication South Africa’s Fragmented Cities: The Unequal Burden of Labor Market Frictions(Washington, DC: World Bank, 2026-01-08)Using high-resolution administrative, census, and satellite data, this paper shows that South African cities are characterized by spatial mismatches between where people live and where jobs are located, relative to 20 global peers. Areas within 5 kilometers of commercial centers have 9,300 fewer residents per square kilometer than expected, which is 60 percent below the global median. Poor, dense neighborhoods are most affected. In Johannesburg, a 10-percentile increase in distance from the nearest business hub corresponds to a 3.7-percentile drop in asset wealth (a proxy of household wellbeing) and 4.9-percentile drop in employment. In Cape Town, the declines are 4.0 and 3.7 percentiles, respectively. Employment is 87 percent lower in the poorest decile than the richest in Johannesburg and 61 percent lower in Cape Town. These findings suggest that South Africa’s spatial organization of people and economic activity constrains agglomeration and reinforces inequality. This methodology provides a scalable and standardized data-driven framework to analyze spatial accessibility and agglomeration frictions in complex, data-constrained urban systems.Publication The Evolution of Local Participatory Democracy in Nepal(Washington, DC: World Bank, 2025-11-05)Nepal is, according to its constitution, among the world’s most decentralized countries, with a long and complex tradition of local-level public participation. This paper traces the evolution of Nepal’s modern participatory institutions, examining the extent to which they are “induced” by external interventions versus being “organically” rooted in indigenous practices. The paper identifies three broad phases: an initial focus on participation in project implementation; a subsequent phase that expanded citizen engagement; and a third phase of citizen empowerment, culminating in the 2015 federal constitution, which granted unprecedented local autonomy. The analysis yields five key findings. First, over the past 50 years, successive reforms have progressively expanded opportunities for citizens to influence local decision-making. Second, these reforms have integrated traditional participatory mechanisms into formal institutions of local government. Third, although central-level initiatives exist, most participatory platforms continue to operate at the local level. Fourth, the federal constitution has created a new landscape of local democracy, embedding autonomy and accountability. Fifth, although they are still valued in many ethnic and territorial communities, traditional participatory practices are gradually disappearing. The paper concludes by offering policy recommendations to help donor agencies and governments strengthen Nepal’s democratic trajectory. It argues that effective interventions should build on Nepal’s deep participatory traditions while recognizing the constitutional reality of far-reaching local autonomy.Publication Institutional Capacity for Policy Implementation: An Analytical Framework(Washington, DC: World Bank, 2026-01-07)State capacity is an important prerequisite for policy implementation, yet at the country level it is difficult to measure, assess, and reform. This paper proposes a focus on institutional capacity: the ability of public institutions to implement the specific policy mandates for which they are responsible. Based on a review of existing literature, the paper defines the different dimensions that compose institutional capacity and groups them into two cross-cutting categories: organizational dimensions (personnel, financial resources, information systems, and management practices) and governance dimensions (transparency, independence, and accountability). The paper proposes measures for organizational and governance dimensions using existing data, shows intra-institutional variation of these measures within countries, and discusses how new data could be collected for better measurement of these concepts. Finally, the paper illustrates how the framework can be used to diagnose the sources of common problems related to weak policy implementation.Publication Closing the Gender Gap in Entrepreneurship: Overcoming Challenges in Law and Practice for Female Entrepreneurs(Washington, DC: World Bank, 2026-01-07)Despite significant strides toward gender equality, women around the world continue to encounter systemic obstacles that hinder their entrepreneurial success. This paper systematically reviews the literature on the barriers female entrepreneurs face and the solutions proposed to overcome these challenges. It discusses institutional factors, financial factors, human capital factors, and social and cultural factors. The literature overview is complemented by a series of stylized facts that illustrate how overcoming some of these existing barriers is correlated with improved women’s entrepreneurship and female labor force participation, drawing on the World Bank’s Women, Business and the Law database as well as the World Bank’s Enterprise Surveys. The findings underscore the need for creating an enabling environment where women can thrive as entrepreneurs.
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication How to Move the Exchange Rate If You Must : The Diverse Practice of Foreign Exchange Intervention by Central Banks and a Proposal for Doing It Better(World Bank, Washington, DC, 2013-05)The paper is about the art of exchange rate management by central banks. It begins by reviewing the diversity of objectives and practices of central bank intervention in the foreign exchange market. Central banks typically exercise discretion in determining when and to what extent to intervene. Some central banks use publicly declared rules of intervention, with the aim of increasing visibility and strengthening the signaling channel of policy. There is tentative evidence that the volatility of foreign exchange reserves is comparatively lower in emerging market economies where central banks follow some form of rules-based foreign exchange intervention. The paper goes on to argue that when the foreign exchange market includes some large strategic participants, the central bank can achieve superior outcomes if intervention takes the form of a rule, or "schedule," indicating commitments to buying and selling different quantities of foreign currency conditional on the exchange rate. Exchange rate management and reserve management can then be treated as two independent objectives by the central bank. In line with the stylized facts reviewed, this would enable a central bank to pursue exchange rate objectives with minimum reserve changes, or achieve reserve targets with minimum impact on the exchange rate.Publication The Real Exchange Rate and Economic Growth(World Bank, Washington, DC, 2008)The real exchange rate was not at the center of the first generation of neoclassical growth models, nor was it prominent among the policy prescriptions that flowed from those models. Recent analyses, in contrast, have paid it more attention. This paper analyzes the role of the real exchange rate in the growth process, the channels through which the real exchange rate influences other variables, and policies useful (and not useful) for governing the real rate. An appendix provides econometric evidence supportive of the emphases in the text.Publication Aid Inflows and the Real Effective Exchange Rate in Tanzania(World Bank, Washington, DC, 2007-12)Tanzania is well placed to receive a significant increase in aid inflows in coming years. Despite the potential for the additional aid inflows to raise income levels in the country, increasing them may bring about structural changes in the economy that may be unwelcome. One such change is an appreciation of the real exchange rate that leads to a contraction of traditional export sectors and a loss of export competitiveness. This paper employs a reduced-form equilibrium real exchange rate approach to explain movements in Tanzania's real effective exchange in recent decades. Particular attention is paid to the relationship between aid inflows and the real effective exchange rate. The authors find that the long-run behavior of the real effective exchange rate is influenced by terms of trade movements, the government's trade liberalization efforts, and aid inflows. Positive terms-of-trade movements are associated with an appreciation, periods of improving trade liberalization are associated with a depreciation, and increases in aid inflows are associated with a depreciation in the real effective exchange rate. Although the last result is non-standard, it is not empirically unique and does have theoretical underpinnings. A detailed analysis of this relationship over the last decade shows that the Bank of Tanzania's response to aid inflows is likely the main reason for the finding.Publication Growth and Competitiveness as Factors of Eurozone External Imbalances : Evidence and Policy Implications(World Bank, Washington, DC, 2013-12)The paper assesses the contribution of key factors associated with external imbalances in the Eurozone through the estimation of a panel-data vector autoregressive model over 1975-2011. Growth fluctuations, initially associated with demand booms triggered by unusually low interest rates and later with demand contractions resulting from the crisis and policy adjustments, have been key drivers of current account fluctuations. Changes in competitiveness, measured by real exchange rates or unit labor costs, have played a less important role. Demand shocks have contributed more to current account balance dynamics in the Eurozone periphery than in the core, whereas competitiveness has been a less prominent factor in the periphery but relatively more important in the core. Changes in competitiveness are positively associated with changes in growth. Preventing imbalances from building up in a context of growing financial integration and easy finance warrants enhanced mutual surveillance of fiscal imbalances, but also better regulation of credit markets to prevent excess leverage and concentration of lending in investments prone to speculative bubbles. Coordination of fiscal policy across the Eurozone would facilitate the management of external imbalances without placing an often unwarranted burden on fiscal tightening in countries with sound fiscal positions affected by credit booms. The policies of internal devaluation implemented in the periphery, aimed at promoting external competitiveness, may have had only limited effectiveness in restoring the external balance to equilibrium.Publication Maldives Economic Update(World Bank, Washington, DC, 2013-04)The political situation remains in a state of flux in the Maldives, with crucial elections coming up. The presidential elections are scheduled for early September 2013, and the Majlis (parliamentary) elections for April 2014. The fiscal position remains in a precarious situation, with the government cash-flow position considerably weakened. Against this backdrop, the government has resorted to very imprudent means of managing the cash-flow situation: (i) ad-hoc borrowings from the banking and private sectors at high interest rates, (ii) monetizing, and (iii) running huge payment arrears, amounting to over 10 percent of gross domestic product (GDP). Continuation of these measures will likely stoke significant imbalances in the economy. The precarious external situation presents the biggest challenge to the country. The situation has been aggravated by continued high fiscal deficits as well as recent debt settlements. Current gross official reserves are below two months of imports and, in face of increased monetization of the deficits, can deteriorate further. In light of the precarious external situation, external debt sustainability has also become a major concern. Under current trajectories, total external debt obligations are projected to reach over 115 percent of GDP by 2015- a seriously vulnerable situation, given the recent slowdown in tourism, and the susceptibility of the economy to external shocks (such as commodity price hikes).
Users also downloaded
Showing related downloaded files
Publication Agribusiness Indicators(World Bank, Washington, DC, 2012-12)Agriculture and agribusiness play an important role in the Zambian economy, contributing around 20 percent of gross domestic product (GDP) in recent years and about 12 percent of national export earnings. Agriculture employs nearly 70 percent of the labor force and remains the main source of income and employment for most of the people living in rural areas. The objective of the Zambia agribusiness indicators (ABI) country report is to examine factors that have affected agricultural productivity, market access, and the policy environment for agriculture in Zambia. This report presents findings of a data collection exercise carried out to compile a set of pilot ABI for Zambia. The pilot indicators presented are based on a review of the literature, government statistical bulletins, and primary interviews in the seed, fertilizer, mechanization, agricultural finance, and transport subsectors. The resulting indicators are presented in matrix form, together with notes indicating the specific data source (or sources) used for each indicator. A set of questionnaires was developed for this part of the exercise based on guidelines. Perception indicators on the quality of road infrastructure and other transport sector issues were added to supplement the checklist guidelines. The anticipated impact of the presentation of country performances will be to raise the competitiveness of African agriculture by bringing into sharper focus measures of how individual countries are transitioning towards a more commercial agriculture. This report consists of following seven chapters: chapter one gives introduction; chapter two presents access to and use of improved seed; chapter three focuses on fertilizer access and availability; chapter four focuses on access to farm machinery and tractor hire services; chapter five presents access to agricultural and agri-enterprise finance; chapter six gives cost and efficiency of transport in Zambia; and chapter seven presents policy and enabling environment for agribusiness development.Publication Youth at Risk in Latin America and the Caribbean : Understanding the Causes, Realizing the Potential(Washington, DC : World Bank, 2008)Realizing the potential of Latin America and the Caribbean's (LAC) youth is essential not only to their well-being, but also to the long-term welfare of the whole region. Young people's families, communities, and governments as well as private, nonprofit, and international organizations, have a responsibility to help youth reach their potential. There have been many successes but also important failures. How to build on the successes and correct the failures is the subject of this report. This book has two objectives: to identify the at-risk youth in LAC, and to provide evidence-based guidance to policy makers in LAC countries that will help them to increase the effectiveness and efficiency of their youth investments. The book concludes that governments can be more effective in preventing young people from engaging in risky behavior in the first place and also in assisting those who already are engaged in negative behavior. To support governments in this endeavor, the book provides a set of tools to inform and guide policy makers as they reform and implement programs for at-risk youth.Publication Digital Africa(Washington, DC: World Bank, 2023-03-13)All African countries need better and more jobs for their growing populations. "Digital Africa: Technological Transformation for Jobs" shows that broader use of productivity-enhancing, digital technologies by enterprises and households is imperative to generate such jobs, including for lower-skilled people. At the same time, it can support not only countries’ short-term objective of postpandemic economic recovery but also their vision of economic transformation with more inclusive growth. These outcomes are not automatic, however. Mobile internet availability has increased throughout the continent in recent years, but Africa’s uptake gap is the highest in the world. Areas with at least 3G mobile internet service now cover 84 percent of Africa’s population, but only 22 percent uses such services. And the average African business lags in the use of smartphones and computers as well as more sophisticated digital technologies that catalyze further productivity gains. Two issues explain the usage gap: affordability of these new technologies and willingness to use them. For the 40 percent of Africans below the extreme poverty line, mobile data plans alone would cost one-third of their incomes—in addition to the price of access devices, apps, and electricity. Data plans for small- and medium-size businesses are also more expensive than in other regions. Moreover, shortcomings in the quality of internet services—and in the supply of attractive, skills-appropriate apps that promote entrepreneurship and raise earnings—dampen people’s willingness to use them. For those countries already using these technologies, the development payoffs are significant. New empirical studies for this report add to the rapidly growing evidence that mobile internet availability directly raises enterprise productivity, increases jobs, and reduces poverty throughout Africa. To realize these and other benefits more widely, Africa’s countries must implement complementary and mutually reinforcing policies to strengthen both consumers’ ability to pay and willingness to use digital technologies. These interventions must prioritize productive use to generate large numbers of inclusive jobs in a region poised to benefit from a massive, youthful workforce—one projected to become the world’s largest by the end of this century.Publication From Evidence to Policy Supporting Nepal’s Trade Integration Strategy(World Bank, Washington, DC, 2016-07-01)Nepal's trade balance in goods and services has been in deficit for many years. The large deficit has not resulted in a substantial accumulation of net foreign liabilities, as it has been largely financed with workers' remittances from abroad. Indeed, remittances are the largest component of the current account. This report aims at addressing the following questions: what are the underlying drivers of the trade imbalances and their relative contributions to the deficit (e.g. domestic private expenditure fueled by remittances versus public expenditures, relative prices, etc.)? What are the paths to be expected for the trade balance and the current account in the medium run, based on reasonable forecast assumptions for the main identified determinants? What are the implications of high remittances for the competitiveness in the short and long-run? How can Nepal maximize the positive impact of remittances in the economy? The authors assess the impact of remittances on Nepal's real exchange rate and attempt to distinguish between their short and long term impact. To conclude, efforts to increase savings and improve the allocation of remittances should also be accomplished through improvements in the overall investment climate and the business environment.Publication Toward a Blue Economy(World Bank, Washington, DC, 2016-09)The report is structured in four chapters that together, responds to the fundamental questions raised by decision-makers within finance ministries and central banks across the Caribbean. Chapter one provides a working definition of the ocean economy and the blue economy concepts, and explains why these terms are growing in importance globally and specifically across the Caribbean. Chapter two deconstructs the ocean economy, suggesting that a significant portion of the economic value derived from the ocean is based on the natural resources and ecological systems that function in economic terms as the ocean economy’s natural capital asset base. Chapter three attempts to reconcile two global and Caribbean region-specific trends, a growing ocean economy and declining natural capital asset base, and suggests that reformed and integrated policy packages are necessary for sustainable development of countries’ ocean space and long-term growth from their ocean economies. Chapter four offers an approach for consideration by decision-makers to serve as a guide in enabling a transition toward a Caribbean blue economy.