Macroeconomic Implications of Real Exchange Rate Targeting in Developing Countries

IMF Working Papers, March 1, 1991

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Macroeconomic Implications of Real Exchange Rate Targeting in Developing Countries

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Bibliographic details

• Authors: Peter J Montiel, Jonathan David Ostry
• Published: March 1, 1991
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451844702.001

Summary

• Analyzes the macroeconomic effects of a variety of exogenous and policy-induced real disturbances when the authorities target the level of the real exchange rate.
• Discusses implications—particularly for inflation and the current account—of targeting the rate at an “overdepreciated” level.
• Examines the dynamic response of both output and inflation to a number of shocks.
• Considers further applications of the model, particularly as regards fiscal explanations of inflation, high-inflation plateaus, and money-based stabilization programs.

Major themes and analytical focus

• Targeting the level of the real exchange rate:
  • Implications for inflation.
  • Implications for the current account.
  • Specific analysis of targeting at an “overdepreciated” level.
• Dynamic responses to shocks:
  • Response of output.
  • Response of inflation.
• Model applications:
  • Fiscal explanations of inflation.
  • High-inflation plateaus.
  • Money-based stabilization programs.

Key findings and takeaways

• The paper provides a framework for assessing macroeconomic effects of real disturbances under real exchange rate targeting.
• Emphasizes trade-offs involving inflation and the current account when the real exchange rate is policy-targeted.
• Presents dynamic analysis detailing how output and inflation evolve following various shocks.
• Extends the model to address fiscal origins of inflation, persistent high inflation episodes, and programs that are centered on monetary stabilization.

Publication and document specifics

• Authors: Peter J Montiel, Jonathan David Ostry
• Date: March 1, 1991
• Pages: 49
• Volume: 1991
• Issue: 029
• Series: Working Paper No. 1991/029
• DOI: https://doi.org/10.5089/9781451844702.001
• Stock No: WPIEA0291991
• ISBN: 9781451844702
• ISSN: 1018-5941

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.