Exchange Rate Regimes and Macroeconomic Performance in South Asia

Stylized facts for South Asia show the dominance of supply shocks, amplified by macroeconomic policies and procyclical current accounts. Interest and exchange rate volatility rose initially on liberalization, but fell as markets deepened. A gradual middling through approach to openness and market development are helping the region absorb shocks without reducing growth. Diverse sources of demand, flexible exchange rates, robust domestic savings, and changing political preferences are contributing. Countercyclical policy more suited to structure, and removal of distortions raising costs, would allow better coordination of monetary and fiscal polices to further support the process.[WP-2010-005]