Dealing with Uncertain Economic Times: The Outlook for Asia

Recent large equity sell-offs across Asia and safe haven flows into Japan illustrate perfectly the region’s vulnerabilities to further global shocks. While the region’s fundamentals—built up over the past decade—remain relatively strong, economic uncertainties in Europe and the United States pose large downside risks. The world economy has entered a dangerous new phase and, as the IMF’s Managing Director stated recently, “what makes the situation all the more urgent is that it has implications for every country.” Our Regional Economic Outlook for Asia and the Pacific emphasizes these risks, and stresses the need for policymakers to remain vigilant and nimble in this extraordinarily uncertain climate. The view from here in Tokyo—looking out at the region—may be more serene than the view from other advanced country capitals, but there are storm clouds on the horizon.

Does Foreign Exchange Intervention Slow the Pace of Currency Appreciation?

Abundant global liquidity and high exposure to capital movements have put foreign exchange intervention at center stage of the policy debate in Latin America. Although intervention is widely used, there is limited evidence about its effects on the exchange rate (particularly in terms of slowing the pace of currency appreciation). In the latest Regional Economic Outlook: Western Hemisphere we took a fresh look at intervention practices and effectiveness for a group of economies in Latin America and other regions during 2004-10. Our analysis suggests that foreign exchange market interventions may help to mitigate appreciation temporarily. However, the impact depends on the circumstances and characteristics of each country.

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