Credibility and Exchange Rate Management in Developing Countries

Author/Editor:

Pierre-Richard Agénor

Publication Date:

September 1, 1991

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:

The paper examines the role of credibility in the conduct of exchange rate policy in developing countries, The analysis is based on a model in which policymakers are concerned about inflation and external competitiveness. Price setters in the nontraded goods sector of the economy adjust prices in reaction to anticipated fluctuations in the domestic price of tradable goods. This type of model is showm to generate a “devaluation bias” which undermines the credibility of a fixed exchange rate. The effect of reputational factors, signaling considerations, and joining a currency union as possible solutions to this bias is examined.

Series:

Working Paper No. 1991/087

Subject:

Conventional peg Exchange rate policy Exchange rates Foreign exchange Inflation Prices Real exchange rates

English

Publication Date:

September 1, 1991

ISBN/ISSN:

9781451850925/1018-5941

Stock No:

WPIEA0871991

Pages:

43

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