Lists
Lists
Lo, Yuen C. and Volz, Ulrich (2025) Disasters and exchange rates. In: Risks and challenges for public debt management: inflation, markets and climate. Proceedings of the 3rd public debt management conference, Washington, D.C., October 3-4, 2024, 3-4 October 2024, Washington D.C..
This paper investigates the impact of disasters on exchange rates and discusses risks to public debt sustainability and ways of mitigating these. The paper documents heterogeneous effects of disasters across country groups, with lesser developed economies being affected the worst in terms of capital outflows and exchange depreciation. Notably, International Development Association (IDA) eligible borrowers see portfolio and other investment outflows and a decline in their exchange rate after large disasters. A depreciation of the exchange rate implies higher import costs, rising inflation and higher debt service costs in cases where debt is denominated in foreign currency. Since climate change is expected to increase both the frequency and intensity of disasters, our analysis indicates that poor countries are going to face heightened exchange rate risk in the future. This not only heightens the imperative of investing in adaptation and resilience to reduce the vulnerability to disasters. It also reinforces the importance of reducing the dependency on foreign currency financing and the need of hedging exchange rate risk in public debt management.
 |
View Item |