Deer Hunting: Misalignment, Debt Accumulation, and Desired Equilibrium Exchange Rates
IMF Working Papers, June 1, 1993
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- Deer Hunting: Misalignment, Debt Accumulation, and Desired Equilibrium Exchange Rates
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Bibliographic details
- Authors: Mark P. Taylor, Michael J. Artis
- Published: June 1, 1993
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451972269.001
Core research question and scope
- Examines hysteresis in the desired equilibrium exchange rate (DEER) arising from misalignment.
- Focuses on how departures of the actual real exchange rate from its DEER value alter current account realizations and consequent debt service obligations, necessitating recomputation of the DEER.
- Considers the dynamic interaction where the evolution of actual exchange rates depends on the DEER.
Main findings and contributions
- Derives a formal expression for the hysteresis effect in the DEER that captures how past misalignments affect the recalculated DEER.
- Studies the convergence properties of a system in which actual exchange rates evolve with reference to the DEER.
- Provides illustrative calculations of the historical significance of the hysteresis effect.
- Derives and applies practical rules of thumb for computing the hysteresis effect when assessing the rate of approach of an exchange rate to its DEER value.
Analytical implications
- Misalignment leads to differences between realized current account outcomes and those assumed in initial DEER calculations, which in turn change debt service obligations and require DEER recomputation.
- Hysteresis implies path dependence: the DEER at any point can depend on previous exchange rate deviations and their impact on external debt dynamics.
- Convergence analysis clarifies conditions under which the system returns to, overshoots, or diverges from the DEER trajectory when actual rates respond to the DEER.
Practical tools and heuristics
- Offers rules of thumb for estimating the magnitude of the hysteresis effect given assumptions about the rate at which an exchange rate approaches its DEER value.
- Illustrative historical calculations demonstrate how sizable the recalculations can be in practice when significant misalignments occur.
Subjects and keywords
- Subjects: 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