Abstract

This paper empirically analyzes a broad range of real exchange rate appreciation episodes.The cases are identified after compiling a large sample of monthly multilateral real exchange rates from 1960 to 1994. The objective is twofold. First, the paper studies the dynamics of appreciations, avoiding the sample selection of analyzing exclusively the crisis (or devaluation) cases. Second, the paper analyzes the mechanism by which overvaluations are corrected. In particular, we are interested in the proportion of the reversions that occur through nominal devaluations, rather than cumulative inflation differentials.We calculate the probability of undoing appreciations without nominal depreciations for various degrees of misalignment. The overall conclusion is that it is very unlikely to undo large and medium appreciations without nominal devaluations.

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Background Governments worldwide have implemented large-scale non-pharmaceutical interventions, such as social distancing or school closures, to prevent and control the growth of the COVID-19 pandemic. These strategies, implemented with varying stringency, have imposed substantial social and economic costs to society. As some countries begin to reopen and ease mobility restrictions, lockdowns in smaller geographic areas are increasingly considered an attractive policy intervention to mitigate societal costs while controlling epidemic growth. Nevertheless, there is a lack of empirical evidence to support these decisions. Methods Drawing from a rich data set of localized lockdowns in Chile, we used econometric methods to measure the reduction in local economic activity from lockdowns when applied to smaller or larger geographical areas. We measured economic activity by tax collection at the municipality-level. Results Our results show that lockdowns were associated with a 10%-15% drop in local economic activity, which is twice the reduction in local economic activity suffered by municipalities that were not under lockdown. A three-to-four-month lockdown had a similar effect on economic activity than a year of the 2009 great recession. We found costs are proportional to the population under lockdown, without differences when lockdowns were measured at the municipality or city-wide levels. Conclusions Our findings suggest that localized lockdowns have a large effect on local economic activity, but these effects are proportional to the population under lockdown. Our results suggest that epidemiological criteria should guide decisions about the optimal size of lockdown areas since the proportional impact of lockdowns on the economy seems to be unchanged by scale.