Report
What is the best policy for emerging countries with external deficits when their exchange rates depreciate?
Some emerging countries have chronic external deficits (Argentina, Brazil, Mexico, Turkey, India, South Africa, Indonesia) and their exchange rates therefore depreciate sharply when they face capital outflows. The exchange - rate depreciation exerts a negative effect on these countries’ real activity, the dominant mechanism being a loss of real income caused by the rise in import prices. So what is the best economic policy reaction in these countries? They can: Rais e their interest rates, but the risk is then that domestic demand will weaken further ; Introduc e controls on capital outflows, but they may discourage investors from returning to these countries. The only reasonable solution would be for emerging countries to be financed by stable, long - term capital and no t by volatile , short - term capital .
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Natixis
Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.
Patrick Artus
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