External Shocks and Inflation in Developing Countries Under a Real Exchange Rate Rule

Author/Editor:

Jonathan David Ostry ; Peter J Montiel

Publication Date:

September 1, 1992

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 shows that the response of inflation to external shocks is very different when the authorities target the real exchange rate than when they follow a fixed exchange rate or a preannounced crawling peg. Specifically, shocks that would have no effect on the steady-state inflation rate under a fixed exchange rate are either inflationary or deflationary under a real exchange rate rule. Moreover, irrespective of the degree of capital mobility, the authorities will find it difficult to mitigate the destabilizing effects of real shocks on the price level by using monetary policy, except possibly in the very short run.

Series:

Working Paper No. 92/75

Subject:

English

Publication Date:

September 1, 1992

ISBN/ISSN:

9781451849646/1018-5941

Stock No:

WPIEA0751992

Format:

Paper

Pages:

48

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