02198cas a2200241 a 4500 AALejournalIMF020911 230101c9999 xx r poo 0 0eng d 5.00 USD 9781513545226 1018-5941 BD-DhAAL BD-DhAAL Culiuc, Alexander. Real Exchange Rate Overshooting in Large Depreciations : Determinants and Consequences / Alexander Culiuc. Washington, D.C. : International Monetary Fund, 2020. 1 online resource (48 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students The consequences of large depreciations on economic activity depend on the relative strength of the contractionary balance sheet and expansionary expenditure switching effects. However, the two operate over different time horizons: the balance sheet effect hits almost immediately, while expenditure switching is delayed by nominal rigidities and other frictions. The paper hypothesizes that the overshooting phase-observed early in the depreciation episode and driven by the balance sheet effect-is largely irrelevant for expenditure switching, which is more closely aligned with ex-post equilibrium depreciation. Given this, larger real exchange rate overshooting should signal a relatively stronger balance sheet effect. Empirical findings support this hypothesis: (i) overshooting is driven by factors associated with the balance sheet effect (high external debt, low reserves, low trade openness), (ii) overshooting-based measures of the balance sheet effect foreshadow post-depreciation output losses, and (iii) the balance sheet effect is strongest early on, while expenditure switching strengthens over the medium term. Mode of access: Internet IMF Working Papers; Working Paper ; No. 2020/060 Full text available on IMF http://elibrary.imf.org/view/journals/001/2020/060/001.2020.issue-060-en.xml IMF e-Library