Deer Hunting: Misalignment, Debt Accumulation, and Desired Equilibrium Exchange Rates
June 1, 1993
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Summary
This paper deals with hysteresis in the desired equilibrium exchange rate (DEER) arising from misalignment. When the actual real exchange rate departs from its DEER value, current account realizations--and consequently, debt service obligations--will differ from those assumed in the initial DEER calculation, necessitating its recomputation. The paper derives a formal expression for this hysteresis effect in the DEER, studies the convergence properties of a system in which the evolution of actual exchange rates depends on the DEER and provides illustrative calculations of its historical significance. Finally, the paper derives and applies rules of thumb for computing the hysteresis effect when considering the rate of approach of an exchange rate to its DEER value.
Subject: Balance of payments, Current account balance, Debt service, Exchange rate adjustments, Exchange rates, External debt, Foreign exchange, Real exchange rates
Keywords: Current account balance, Debt service, DEER adjustment, DEER devaluation, deer hunting, DEER trajectory, DEER value, equilibrium exchange rate, exchange rate, Exchange rate adjustments, exchange rate movement, Exchange rates, Global, rate of exchange, Real exchange rates, WP
Pages:
36
Volume:
1993
DOI:
Issue:
048
Series:
Working Paper No. 1993/048
Stock No:
WPIEA0481993
ISBN:
9781451972269
ISSN:
1018-5941
Notes
This paper deals with hysteresis in the desired equilibrium exchange rate (DEER) arising from misalignment.
