TY - JOUR AU - Aizenman,Joshua AU - Edwards,Sebastian AU - Riera-Crichton,Daniel TI - Adjustment patterns to commodity terms of trade shocks: the role of exchange rate and international reserves policies JF - National Bureau of Economic Research Working Paper Series VL - No. 17692 PY - 2011 Y2 - December 2011 UR - http://www.nber.org/papers/w17692 L1 - http://www.nber.org/papers/w17692.pdf N1 - Author contact info: Joshua Aizenman Economics and SIR USC University Park Los Angeles, CA 90089-0043 Tel: 213-740-4066 E-Mail: aizenman@usc.edu Sebastian Edwards UCLA Anderson Graduate School of Business 110 Westwood Plaza, Suite C508 Box 951481 Los Angeles, CA 90095-1481 Tel: 310/206-6797 Fax: 310/206-5825 E-Mail: sebastian.edwards@anderson.ucla.edu Daniel Riera-Crichton Department of Economics, Bates College Andrews Road 2 Office 237 Pettingill Hall Lewiston, ME 04240 E-Mail: drieracr@bates.edu AB - We analyze the way in which Latin American countries have adjusted to commodity terms of trade (CTOT) shocks in the 1970-2007 period. Specifically, we investigate the degree to which the active management of international reserves and exchange rates impacted the transmission of international price shocks to real exchange rates. We find that active reserve management not only lowers the short-run impact of CTOT shocks significantly, but also affects the long-run adjustment of REER, effectively lowering its volatility. We also show that relatively small increases in the average holdings of reserves by Latin American economies (to levels still well below other emerging regions current averages) would provide a policy tool as effective as a fixed exchange rate regime in insulating the economy from CTOT shocks. Reserve management could be an effective alternative to fiscal or currency policies for relatively trade closed countries and economies with relatively poor institutions or high government debt. Finally, we analyze the effects of active use of reserve accumulation aimed at smoothing REERs. The result support the view that “leaning against the wind” is potent, but more effective when intervening to support weak currencies rather than intervening to slow down the pace of real appreciation. The active reserve management reduces substantially REER volatility. ER -