Targeting the Real Exchange Rate: Theory and Evidence
Summary:
This paper presents a theoretical and empirical analysis of policies aimed at setting a more depreciated level of the real exchange rate. An intertemporal optimizing model suggests that, in the absence of changes in fiscal policy, a more depreciated level of the real exchange can only be attained temporarily. This can be achieved by means of higher inflation and/or higher real interest rates, depending on the degree of capital mobility. Evidence for Brazil, Chile, and Colombia supports the model’s prediction that undervalued real exchange rates are associated with higher inflation.
Series:
Working Paper No. 1994/022
Subject:
Consumption Exchange rates Financial services Foreign exchange Inflation National accounts Prices Real exchange rates Real interest rates
English
Publication Date:
February 1, 1994
ISBN/ISSN:
9781451921212/1018-5941
Stock No:
WPIEA0221994
Pages:
50
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