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Mr. Mark A Horton, Hossein Samiei, Mr. Natan P. Epstein, and Mr. Kevin Ross
Since late 2014, exchange rates (ERs) and ER regimes of the Caucasus and Central Asia (CCA) countries have come under strong pressure. This reflects the decline of oil and other commodity prices, weaker growth in Russia and China, depreciation of the Russian ruble, and appreciation of the U.S. dollar, to which CCA currencies have historically been linked. Weaker fiscal and current account balances and increased dollarization have complicated the picture. CCA countries entered this period with closely managed ER regimes and, in many cases, currencies assessed by IMF staff to be overvalued. CCA central banks have price stability as their main policy objective, and most have relied on ER stability to achieve this objective. Thus, the first policy response involved intervention in local foreign exchange (FX) markets, often with limited communication. In this context, the IMF staff has reviewed ER policy advice and implementation strategies for CCA countries.
Mr. Antonio David and Carlos Eduardo Gonçalves
This paper investigates what factors affect the duration of sudden stops in capital flows using quarterly data for a large panel of countries. We find that countries with floating exchange rate regimes tend to experience shorter sudden stop episodes and that fixed exchange rate regimes are associated with longer periods of low output growth following sudden stops. These effects are quantitatively large: having a flexible exchange rate regime increases the probability of exiting the sudden stop state by between 50 to 80 percent. Flexible exchange rate regimes significantly shorten the duration of output decelerations following sudden stops by over 30 percent. Positive variations in terms of trade also abbreviate the duration of sudden stops. In terms of policies, identification is trickier, but the evidence suggests that monetary policy tightening shortens the duration of sudden stops. Changes in capital account restrictions do not seem to matter.
Mr. Mark A Horton, Hossein Samiei, Mr. Natan P. Epstein, and Mr. Kevin Ross

been a serious issue. Figure 3 . CCA External and Internal Balances Figure 4 . CCA Linkages with Russia and China Monetary and ER Regimes in the CCA All CCA central banks have price stability as their main monetary policy objective. However, the instruments to achieve this vary and typically include both the ER and the interest rate, as well as direct control over liquidity. Four CCA countries (Armenia, Georgia, Kazakhstan, and the Kyrgyz Republic) have a form of inflation-targeting (IT) in place. ER intervention remains an important

João Tovar Jalles, Mr. Carlos Mulas-Granados, and José Tavares

Political Composite Variables and Descriptive Statistics 2. Factor Loadings and Uniqueness 3. Baseline, Fixed Effects Regressions 4. Interaction Terms, Fixed Effects Regressions 5. Sensitivity to Alternative Estimators 6. Endogeneity: Instrumental Variables 7. Discretionary Fiscal Consolidations as Proxy for Fiscal Discipline: Logit Estimations 8. Robustness to Alternative Definition of ER Regime APPENDICES 1. Robustness 2. Synthetic Control Methodology APPENDIX TABLES A1. Robustness to Alternative Measures of Fiscal Discipline

Mr. Luca A Ricci and Wei Shi

. Robustness—Baseline vs. Error-Correction (ST) 10. Robustness—Output Gap (ST) 11. Robustness—Pre-2009 vs. Full Sample (ST) Appendix Additional Material Appendix Figures 1. ER Regime/K Control Development 2. Model Fit for Brazil—Baseline (LT) 3. Model Fit for Mexico—Baseline (LT) 4. Floating Allow More Reaction to Domestic Inflation (ST) 5. Country-Specific Response to U.S. over Different Horizon 6. ST vs. LT Responses to U.S. Rate 7. Greenspan Conundrum for EM (LT & ST) 8. Effect Across the Curve (ST, Global Factors & NEER) 9. Response to

Mr. Mark A Horton, Hossein Samiei, Mr. Natan P. Epstein, and Mr. Kevin Ross

For CCA energy importers, lower energy prices have not translated into significant savings. This reflects the prevalence of long-term contracts priced in dollars and, in some countries, lack of competition and flexibility in supply arrangements. 2 Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER). 3 While Kazakhstan officially adopted a floating ER regime in August 2015, the IMF’s AREAER reclassification to floating (de facto) requires a period of at least six months of increased volatility in the ER without noticeable

Mr. Mark A Horton, Hossein Samiei, Mr. Natan P. Epstein, and Mr. Kevin Ross

-mail: publications@imf.org www.imfbookstore.org www.elibrary.imf.org Contents Executive Summary Chapter 1. Introduction Recent ER Movements Monetary and ER Regimes in the CCA Assessment of CCA Currency Misalignments CCA Financial Sectors Capital Controls in the CCA Central Bank Independence and Transparency in the CCA Chapter 2. ER Policy Advice IMF ER Policy Advice and Rationale Macroeconomic Policy Advice Under Current Conditions Monetary Policy Modernization in Support of Greater ER Flexibility ER Adjustment Chapter 3

Gustavo Adler, Mr. Nicolas E Magud, and Alejandro M. Werner
We study the process of external adjustment to large terms-of-trade level shifts—identified with a Markov-switching approach—for a large set of countries during the period 1960–2015. We find that adjustment to these shocks is relatively fast. Current accounts experience, on average, a contemporaneous variation of only about ½ of the magnitude of the price shock—indicating a significant volume offset—and a full adjustment within 3–4 years. Dynamics are largely symmetric for terms-of-trade booms and busts, as well as for advanced and emerging market economies. External adjustment is driven primarily by offsetting shifts in domestic demand, as opposed to variations in output (also reflected in the response of import rather than export volumes), indicating a strong income channel at play. Exchange rate flexibility appears to have played an important buffering role during booms, but less so during busts; while international reserve holdings have been a key tool for smoothing the adjustment process.