Real Exchange Rate Targeting Under Capital Controls: Can Money Provide a Nominal Anchor?

By Peter J Montiel, Jonathan David Ostry

July 1, 1991

Preview Citation

Format: Chicago

Peter J Montiel, and Jonathan David Ostry. Real Exchange Rate Targeting Under Capital Controls: Can Money Provide a Nominal Anchor?, (USA: International Monetary Fund, 1991) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper examines the issue of whether the money supply can serve as a nominal anchor for the domestic price level under real exchange rate targeting. When capital controls are perfect so that there is complete separation between official and unofficial markets for foreign exchange, the domestic inflation rate can be stabilized, but only at the expense of a widening gap between official and parallel market exchange rates. When cross - transactions between the two markets are permitted, the steady state of the model is identical to that of a model without capital controls and, hence, the money supply cannot serve as a nominal anchor for the price level in the long run. If capital controls are nevertheless maintained temporarily, and are known to be temporary, targeting the money supply fails to stabilize the rate of inflation even in the short run.

Subject: Capital controls, Inflation, Monetary base, Real exchange rates, Terms of trade

Keywords: Inflation rate, Money supply, WP

Publication Details

Pages:

25
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1991/068
Stock No:

WPIEA0681991
ISBN:

9781451961010
ISSN:

1018-5941

Notes

Also published in Staff Papers, Vol. 39, No. 1, March 1992.

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