Comments on foreign exchange policy, environment and climate change - - PowerPoint PPT Presentation

Roland Kpodar (International Monetary Fund)

The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management

Comments on foreign exchange policy, environment and climate change

REER and CO2 emissions

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• A thought-provoking paper with empirically robust results
• Important insights to policy implementation (growth-environment trade-off associated

with exchange rate depreciation)

• However, two points may merit further discussions :

 Technological change is considered as a long-run phenomenon in the analysis, but today’s technological change is more likely to be rapid and disruptive. To what extent this could alter the conclusions of the paper?  Exchange rate depreciation could also reduce CO2 emissions in developing countries, since an overvalued exchange rate reduces the cost of imported fuels (acting as a subsidy) and thus encourages overconsumption.

REER and CO2 emissions

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• Key contribution of this paper: opens new opportunities to deepen our

understanding on the complex relationship between exchange rate and climate along the path of economic development.

• Not only it is important to understand how exchange rate affects climate change,

but also to what extent the economic effect of climate change can be mitigated by the exchange rate.

• A few thoughts focusing on natural disasters follow in the next slides

Frequency of natural disasters has been on the rise

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50 100 150 200 250 300 350 400 450 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Frequency of Natural Disasters

drought earthquake flood landslide storm wildfire

Economic impact and human cost are significant

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0,0 0,5 1,0 1,5 2,0 2,5 3,0 Damage/GDP Affected/population

Average Impact by Country Group (1980-2017)

LICs Developing countries Small States

0,0 1,0 2,0 3,0 4,0 5,0 damage/GDP Affected/population

Average Impact by Exchange Rate Regime (1980-2017)

Fixed Flexible

Natural disasters and growth : does exchange rate policy matter?

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Impulse response function of real GDP growth to a natural disaster shock (all countries)

• Notes. Local projections (Jorda, 2005). Real GDP growth rate is the dependent variable. Natural disaster shock

is captured by the log of the share of population affected. Control variable includes initial GDP per capita, inflation, trade openness, government spending/GDP, primary school enrollment rate, and private credit ratio. Regression estimated over the period 1960-2015.

Natural disasters and growth : does exchange rate policy matter?

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Impulse response of real GDP growth to a natural disaster shock: fixed vs flexible exchange rate

• Notes. Local projections (Jorda, 2005). Real GDP growth rate is the dependent variable. Natural disaster shock

is captured by the log of the share of population affected. Control variable includes initial GDP per capita, inflation, trade openness, government spending/GDP, primary school enrollment rate, and private credit ratio. Regression estimated over the period 1960-2015.

Natural disasters and growth : does exchange rate policy matter? Yes but with some caveats

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 Vulnerability to natural disasters, arguably not a major driver of the

choice of an exchange rate regime.

 While exchange rate flexibility may help buffer shocks, it could also

amplify balance sheet effects.

 Resilience building is key (resilient infrastructure, policy buffers,

insurance, external financings including concessional loans, and so

• n…)

References

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 Arcand, Jean-Louis & Guillaumont, Patrick & Jeanneney, Sylviane Guillaumont, 2008.

“Deforestation and the real exchange rate," Journal of Development Economics, vol. 86(2), pages 242-262.

 Arcand, Jean-Louis & Guillaumont, Patrick & Jeanneney, Sylviane Guillaumont, 2019. “Carbon

Emissions and the Real Exchange Rate,“ FERDI/Banque de France/AFD Conference, Paris, February 14, 2019.

 Ramcharan, Rodney, 2007. "Does the exchange rate regime matter for real shocks? Evidence

from windstorms and earthquakes," Journal of International Economics, vol. 73(1), pages 31- 47.

THANK YOU