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© 2022 International Monetary Fund
WP/22/225
IMF Working Paper
Western Hemisphere Department
Lessons from Haiti’s Recent Exchange Rate Developments Rina Bhattacharya and Neil Shenai*
Authorized for distribution by Nicole Laframboise
November 2022
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: From August to October 2020, the Haitian authorities were successful at bringing about a sharp appreciation in the gourde/U.S. dollar exchange rate. This paper analyzes the factors behind this appreciation and its spillovers on the economy. It finds that foreign exchange surrender requirements had a statistically significant effect on the nominal exchange rate, while foreign exchange intervention by the central bank did not. Surrender requirements were also found to have raised trading costs and volatility in the foreign exchange market and contributed to the development of a wider parallel nominal exchange rate premium. This appreciation contributed to a decline in headline inflation during the episode while delivering some fuel subsidy-related savings to the government. Remittance-dependent households and exporters saw a drop in their purchasing power, and Haiti’s net external buffers were adversely affected. Following from these findings, the paper offers recommendations on ways to facilitate foreign exchange management and boost external sustainability while contributing to the central bank’s overall policy objectives.
| RECOMMENDED CITATION: Bhattacharya, Rina and Neil Shenai (2022), “Lessons from Haiti’s Recent Exchange Rate Developments.” IMF Working Paper 22/225. | |
| JEL Classification Numbers: | E50, F40, F41 |
| Keywords: | Haiti foreign exchange rate; fragile state monetary policy; foreign exchange surrender requirements; foreign exchange intervention in fragile states; reserve money programming in fragile states |
| Author’s E-Mail Address: | rbhattacharya@imf.org, nshenai@imf.org |
| RECOMMENDED CITATION: Bhattacharya, Rina and Neil Shenai (2022), “Lessons from Haiti’s Recent Exchange Rate Developments.” IMF Working Paper 22/225. | |
| JEL Classification Numbers: | E50, F40, F41 |
| Keywords: | Haiti foreign exchange rate; fragile state monetary policy; foreign exchange surrender requirements; foreign exchange intervention in fragile states; reserve money programming in fragile states |
| Author’s E-Mail Address: | rbhattacharya@imf.org, nshenai@imf.org |
Title Page
WORKING PAPERS
Lessons from Haiti’s Recent Exchange Rate Developments
Prepared by Rina Bhattacharya and Neil Shenai
Contents
Glossary
Introduction
Review of the Literature
An Overview of Haiti’s Foreign Exchange Market
Understanding the 2020–2021 Episode
Drivers of the 2020–2021 Exchange Rate Developments
Implications of Exchange Rate Developments
Policy Considerations
Conclusion
Annex I. Estimation of an Exchange Rate Model Calibrated for Haiti
Model Details
A VECM of Haiti’s Nominal Exchange Rate
Results
Short-Run Dynamics
Annex II. Modeling the Volatility of Haiti’s Nominal Exchange Rate
Model Details
A GARCH(1,1) Model of Haiti’s Nominal Exchange Rate
Results
Discussion
Annex III. Estimating Exchange Rate Pass-Through to Inflation in Haiti and Regional Peers
Model Details
Model 1: the Auto Regressive Distributed Lag (ARDL) Model of Exchange Rate Pass-through
Model 2: A VECM Estimation of Exchange Rate Pass-through
Discussion
Annex IV. Assessing the Sensitivity of Exports and Remittances to Exchange Rate Movements
Model Details
Model 1: Exports and the REER
Model 2: Imports and the REER
Model 3: Remittances and the REER
References
Glossary
| ARA-CC | - Assessing Reserves Adequacy for Credit Constrained economies |
| ARDL | - Auto regressive distributed lag |
| ARIMA | - Auto regressive integrated moving average |
| BRH | - Bank of the Republic of Haiti |
| FCS | - Fragile and conflict-affected states |
| FMOLS | - Fully modified ordinary least squares |
| GARCH | - Generalized autoregressive conditional heteroskedasticity |
| GEE | - Global Economic Environment |
| INS | - Information Notice System |
| IPF | - Integrated Policy Framework |
| MEF | - Ministry of Economy and Finance |
| NEER | - Nominal effective exchange rate |
| NOP | - Net open positions |
| OLS | - Ordinary least squares |
| REER | - Real effective exchange rate |
| RM | - Reserve money programming |
| SEATS | - signal extraction in ARIMA time series |
| TRAMO | - Time series regression with ARIMA noise, missing observations, and outliers |
| VECM | - Vector Error Correction Model |
| WEO | - World Economic Outlook |
The authors thank Nicole Laframboise, Carolina Osorio Buitron, Patrick LeClerc, and Noah Ndela, for their constructive comments, as well as the country authorities and private sector representatives for their close engagement. They also thank Paola Aliperti F. Domingues (IMF Western Hemisphere Department) and Paolo Galang (IMF Strategy, Policy & Review Department) for their helpful research assistance.