What Makes a Currency Procyclical? An Empirical Investigation
This paper looks at the correlation between the cyclical components of gross domestic product and the exchange rate and classifies countries' currencies as procyclical if they appreciate in good times, countercyclical if they appreciate in bad...
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| Language: | English en_US |
| Published: |
World Bank Group, Washington, DC
2014
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| Online Access: | http://documents.worldbank.org/curated/en/2014/11/20389463/makes-currency-procyclical-empirical-investigation-makes-currency-procyclical-empirical-investigation http://hdl.handle.net/10986/20651 |
| Summary: | This paper looks at the correlation
between the cyclical components of gross domestic product
and the exchange rate and classifies countries'
currencies as procyclical if they appreciate in good times,
countercyclical if they appreciate in bad times, and
acyclical otherwise. With this classification, the paper
shows that: (i) the countries that are commodity exporters
and experience procyclical capital flows tend to have
procyclical currencies; (ii) countries with procyclical
currencies tend to restrict their capital accounts, perhaps
as an attempt to reduce the degree of procyclicality; (iii)
countries with procyclical currencies pursue procyclical
monetary policy; (iv) however, in the last decade, there is
a disconnect between the cyclicality of currency and
monetary policy; and (v) the disconnect may reflect a
decline in the fear of floating, which can be partially
attributed to an improvement in countries' net foreign
asset positions. |
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