Some thoughts on #EmergingMarkets FX. @RobinBrooksIIF has been making a compelling case for letting EM FX play the role of (Corona) shock absorber. The alternative—the “real economy” adjusting instead— is economically, politically and socially an inferior outcome. 1/5

But, I would push back a bit. “Fear of floating” isn’t irrational. Real variables adjust slowly &, thus, FX overshoots. In EM, where money demand is unstable, FX implosion causes portfolio outflows & capital flight. Along w/ leverage, the liquidity squeeze leads to defaults. 2/5

This is not just theoretical. FX-led financial and credit dislocations are already evident in SA and Turkey. And I worry that this could metastasize into healthier economies like Mexico, Colombia and, at the limit, Brazil and Indonesia. 3/5

To be clear, I’m not arguing against FX flexibility. Indeed, “old school” approaches to fighting FX weakeness (including hiking rates) can be harmful. But, at the same time, policies to encourage FX weakness (including excessive policy easing) can be equally dangerous. 4/5

Moreover, FX can’t be the only adjustment lever. Resorting to IFI funding should be the first policy response. And if insufficient, unorthodox measures (including capital controls and standstills), should certainly be on the menu. 5/5