Exchange Rate Policy

Exchange Rate Policy (ERP)

This course, presented by the IMF’s Institute for Capacity Development, presents a comprehensive overview of exchange rate analysis and policy. The first part of the course introduces key definitions and concepts used in exchange rate analysis, including that of real exchange rate misalignment. Next, it discusses how changes in the real exchange rate may affect external adjustment and growth. It then presents the methodologies to estimate the equilibrium real exchange rate, and the IMF External Balance Approach (EBA) to measure real exchange rate misalignment. Finally, the first part of the course covers also several aspects related to foreign exchange (FX) intervention: objectives, modalities, effectiveness, ways to assess the adequacy of foreign exchange reserves, and their management. The second part of the course covers the macroeconomic policy tradeoffs under different exchange rate regimes, the choice of the exchange rate regime, and the main exchange rate policy challenges in developing and emerging market economies, such as the use of hybrid regimes, forced and unforced exits from pegs, and the reasons behind the socalled Fear-of-Floating. The course concludes with a discussion on currency crises, the role of macroeconomic policies to prevent them, and the analytical tools used in the profession to anticipate them.

Course Objectives: Upon completion of this course, participants should be able to: 

• Assess whether FX reserves are adequate using standard and new indicators of reserve adequacy. 

• Assess the effectiveness of interventions in the FX market using case studies of interventions in selected economies. 

• Measure the degree of real exchange rate misalignment using different models and methods, including the IMF EBA. 

• Construct early warning systems for currency crises using data on nominal exchange rates and international reserves. 

• Estimate the probability of experiencing a currency crisis episode with panel data econometric techniques.

• Customize models and techniques taught in this course (including EBA, reserve adequacy metrics, early warning systems for currency crises) to their country data and use them for policy analysis if relevant for their work. 

Participants will also be able to: 

• describe the exchange rate regime choice and how country specific features could influence the appropriate choice or exchange rate regime; 

• identify the policy inconsistencies that may lead to currency crises; and • identify the policy measures to prevent them.