IMF – Currencies in Turbulence, Aug 2024

Climate change is causing more frequent and damaging natural disasters globally. Previous studies have looked at the impact of natural disasters on economic growth, inflation, and other outcomes, but there is a gap in understanding how they affect exchange rates. This paper aims to fill that gap by examining the relationship between natural disasters and exchange rates on a monthly basis. Natural disasters can disrupt infrastructure, supply chains, and productivity, leading to changes in trade balance and depreciation pressure on exchange rates. Understanding this relationship is important for policymakers and investors in assessing risks associated with certain currencies and economies, especially in disaster-prone countries. The paper also explores how exchange rate fluctuations resulting from natural disasters can impact a country's export competitiveness and offers insights on how policymakers can design appropriate monetary and fiscal policies to support economic recovery, stabilize exchange rates, and manage inflationary pressures. The study uses a universal monthly panel data of 177 countries from 1970 to 2019 to examine the impact of natural disasters on exchange rates across different exchange rate regimes and country characteristics.