Does fiscal fragility make markets more inefficient? The exchange rate market in Costa Rica from 2007 to 2025

Resumen:

This paper analyzes the exchange rate market in Costa Rica, Monex, between 2007

and 2025. I show that exchange rate returns became more predictable when the country’s credit rating worsened. I argue that this relationship is due to the central bank’s reaction to the country’s downgrades. In these periods, the central bank only partially replenished reserves sold to state owned companies, a policy akin to covered shorting.

As the country’s fiscal problems receded in 2023, the exchange rate returns again

became less predictable.

Autoría:  Miguel Cantillo

Consultar:  https://ucr.cr/r/R2OZa