Exchange Rate Uncertainty in Money-Based Stabilization Programs

Author/Editor:

R. Armando Morales

Publication Date:

January 1, 1998

Electronic Access:

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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:

Complementing the explanation provided by Calvo and Vegh (1994) for money-based stabilization programs, exchange rate uncertainty introduced to a particular version of the portfolio approach with imperfect competition in the banking system leads to a bias toward appreciation that is directly related to the divergence of expectations and that dampens the interaction between portfolio movements and the real exchange rate. Based on Frankel-Froot, uncertainty exists when the fundamental equilibrium real exchange rate is temporarily unknown in a foreign exchange market with two types of agents: ‘parity-guessers,’ who expect a jump to a reference parity level, and ‘money-followers,’ who expect nominal depreciation equal to the monetary rule.

Series:

Working Paper No. 1998/003

Subject:

Currencies Deposit rates Depreciation Exchange rates Foreign exchange Money National accounts Real exchange rates

English

Publication Date:

January 1, 1998

ISBN/ISSN:

9781451841879/1018-5941

Stock No:

WPIEA0031998

Pages:

18

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