Do Macroprudential Policies Counter Real Exchange Rate Appreciation in Emerging Markets?

Abstract

A competitive and stable real exchange rate (RER) has been recognized as an important variable for promoting economic development, especially in emerging and developing economies (EMDEs). The post global financial crisis era, however, has seen a marked deluge of global liquidity from ultra-loose monetary policy in advanced economies which has led to a surge in capital inflows and consequent loss of external competitiveness in several EMDEs. Given this context, this paper empirically investigates if and what types of macroprudential policies (MaPs) have been effective in countering RER appreciations in a panel of 93 EMDEs over the period 2000-2013. Our results show strong evidence that MaPs moderate RER appreciation through the real interest rate channel, though this is limited to MaPs that target financial institutions rather than borrowers. There is also evidence to suggest that MaPs work more effectively during periods of rising rather than falling real interest rates.