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What makes a currency procyclical ? an empirical investigation

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  • Cordella,Tito
  • Gupta,Poonam - DECOS
Abstract
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.

Suggested Citation

  • Cordella,Tito & Gupta,Poonam - DECOS, 2014. "What makes a currency procyclical ? an empirical investigation," Policy Research Working Paper Series 7113, The World Bank.
    • Handle: RePEc:wbk:wbrwps:7113
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    Cited by:

    1. Kohler, Karsten, 2019. "Exchange rate dynamics, balance sheet effects, and capital flows. A Minskyan model of emerging market boom-bust cycles," Structural Change and Economic Dynamics, Elsevier, vol. 51(C), pages 270-283.
    2. Ha, Jongrim & Marc Stocker, M. & Yilmazkuday, Hakan, 2020. "Inflation and exchange rate pass-through," Journal of International Money and Finance, Elsevier, vol. 105(C).
    3. Olayeni, Olaolu Richard & Tiwari, Aviral Kumar & Wohar, Mark E., 2020. "Global economic activity, crude oil price and production, stock market behaviour and the Nigeria-US exchange rate," Energy Economics, Elsevier, vol. 92(C).
    4. Eiji Fujii, 2024. "Currency concentration in sovereign debt, exchange rate cyclicality, and volatility in consumption," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 160(1), pages 169-192, February.
    5. Roberto Duncan, 2015. "Simple Models to Understand and Teach Business Cycle Macroeconomics for Emerging Market and Developing Economies," Working Papers 49, Peruvian Economic Association.
    6. Tito Cordella & Pablo M. Federico & Carlos A. Vegh & Guillermo Vuletin, 2014. "Reserve Requirements in the Brave New Macroprudential World," World Bank Publications - Books, The World Bank Group, number 17584.
    7. Gupta,Poonam - DECOS, 2016. "Capital flows and central banking : the Indian experience," Policy Research Working Paper Series 7569, The World Bank.
    8. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    9. Ocampo, José Antonio & Ojeda-Joya, Jair, 2022. "Supply shocks and monetary policy responses in emerging economies," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 3(4).
    10. Carlos A. Vegh & Luis Morano & Diego Friedheim & Diego Rojas, "undated". "Between a Rock and a Hard Place," World Bank Publications - Reports 28443, The World Bank Group.
    11. Stijn Claessens & M. Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: A survey," CAMA Working Papers 2017-76, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    12. Ogrokhina, Olena & Rodriguez, Cesar M., 2019. "The effect of inflation targeting and financial openness on currency composition of sovereign international debt," Journal of International Money and Finance, Elsevier, vol. 97(C), pages 1-18.
    13. World Bank Group, 2016. "Global Economic Prospects, January 2016," World Bank Publications - Books, The World Bank Group, number 23435.

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    More about this item

    Keywords

    Economic Stabilization; Macroeconomic Management; Debt Markets; Currencies and Exchange Rates; Emerging Markets;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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