Response of the Equilibrium Real Exchange Rate to Real Disturbances in Developing Countries
IMF Working Papers, January 1, 1991
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- Response of the Equilibrium Real Exchange Rate to Real Disturbances in Developing Countries
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Bibliographic details
- Authors: Mohsin S. Khan, Jonathan David Ostry
- Published: January 1, 1991
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451841800.001
Summary
- Using a simple dependent-economy framework, the paper outlines links between the equilibrium real exchange rate and fundamental exogenous determinants, mainly:
- terms of trade movements
- commercial policy changes
- Drawing on existing studies of trade flows in developing countries, the paper derives plausible quantitative ranges for the response of the equilibrium real exchange rate to both external and policy-induced shocks.
- The results are intended to inform the design of real exchange rate targets and rules that allow for movements in the equilibrium real exchange rate in response to various shocks.
Findings and quantitative insights
- The paper provides plausible quantitative ranges for the response of the equilibrium real exchange rate to:
- external shocks (terms of trade movements)
- policy-induced shocks (commercial policy changes, e.g., tariffs)
- These ranges are derived by drawing on existing studies of trade flows in developing countries (specific numeric ranges are reported in the paper itself).
Policy implications and recommendations
- Design real exchange rate targets and rules that explicitly allow for movements in the equilibrium real exchange rate in response to:
- terms of trade shocks
- commercial policy changes
- Incorporate estimates of demand elasticities and trade-flow responses when assessing appropriate real exchange rate adjustment mechanisms.