Following the launch of the Caucasus, Central Asia, and Mongolia Regional Capacity Development Center (CCAMTAC) in February 2021, and in response to a request from the Azerbaijani authorities to support their statistical capacity development (CD) in government finance statistics (GFS), a series of technical assistance (TA) missions took place remotely (via Zoom meeting platform) during May 17−21 and July 22−August 4, 2021. Both missions were conducted by Mr. Roderick O’Mahony (GFS expert), who worked with the staff of the Ministry of Finance’s Medium-Term Expenditure Framework (MTEF) Development Center as the main counterparts. He also met with other relevant agencies, including the State Oil Fund of the Republic of Azerbaijan (SOFAZ), the State Employment Agency, and the State Social Protection Fund.1
This paper assesses the stabilization properties of fixed versus flexible exchange rate regimes and aims to answer this research question: Does greater exchange rate flexibility help an economy’s adjustment to weather shocks? To address this question, the impact of weather shocks on real per capita GDP growth is quantified under the two alternative exchange rate regimes. We find that although weather shocks are generally detrimental to per capita income growth, the impact is less severe under flexible exchange rate regimes. Moreover, the medium-term adverse growth impact of a 1 degree Celsius increase in temperature under a pegged regime is about –1.4 percentage points on average, while under a flexible regime, the impact is less than one half that amount (–0.6 percentage point). This finding bolsters the idea that exchange rate flexibility not only helps mitigate the initial impact of the shock but also promotes a faster recovery. In terms of mechanisms, our findings suggest that the depreciation of the nominal exchange rate under a flexible regime supports real export growth. In contrast to standard theoretical predictions, we find that countercyclical fiscal policy may not be effective under pegged regimes amid high debt, highlighting the importance of the policy mix and precautionary (fiscal) buffers.
Padamja Khandelwal, Ezequiel Cabezon, Mr. Sanan Mirzayev, and Rayah Al-Farah
Limited economic diversification has made the economies of the Caucasus and Central Asia particularly vulnerable to external shocks. The economies in the region are heavily reliant on oil and mining exports as well as remittances. In some countries, tourism and capital flows also play a prominent role in aggregate economic activity.