## Response of the Equilibrium Real Exchange Rate to Real Disturbances in Developing Countries

_IMF Working Papers, January 1, 1991_

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**Canonical URL:** [Response of the Equilibrium Real Exchange Rate to Real Disturbances in Developing Countries](https://www.imf.org/en/publications/wp/issues/2016/12/30/response-of-the-equilibrium-real-exchange-rate-to-real-disturbances-in-developing-countries-879)

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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

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### 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.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/response-of-the-equilibrium-real-exchange-rate-to-real-disturbances-in-developing-countries-879_