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Ppp Exchange Rate Rules, Macroeconomic (In)Stability, And Learning

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  • Luis-Felipe Zanna
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    Abstract

    In order to maintain competitiveness, governments in developing economies seem to have pursued purchasing power parity (PPP) exchange rate rules, by adjusting the nominal devaluation rate in response to real exchange rate deviations from an intermediate target. This article shows that these rules are likely to induce macroeconomic instability, as they generate sunspot-driven fluctuations that are in fact learnable by agents in the Expectational-Stability sense. It finds that the existence of these "learnable sunspots" depends, among others, on open economy features, including the degree of openness and the degree of exchange rate pass-through to consumer's import prices. Copyright � (2009) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-2354.2009.00561.x
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    Bibliographic Info

    Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

    Volume (Year): 50 (2009)
    Issue (Month): 4 (November)
    Pages: 1103-1128

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    Handle: RePEc:ier:iecrev:v:50:y:2009:i:4:p:1103-1128

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    1. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
    2. Preston, Bruce, 2005. "Learning about Monetary Policy Rules when Long-Horizon Expectations Matter," MPRA Paper 830, University Library of Munich, Germany.
    3. Schmitt-Grohe, Stephanie & Uribe, Martin, 2001. "Stabilization Policy and the Costs of Dollarization," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 482-509, May.
    4. Reinhart, Carmen & Calvo, Guillermo & Vegh, Carlos, 1994. "Targeting the real exchange rate: Theory and evidence," MPRA Paper 13412, University Library of Munich, Germany.
    5. Galí, Jordi & Monacelli, Tommaso, 2002. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," CEPR Discussion Papers 3346, C.E.P.R. Discussion Papers.
    6. Dupor, Bill, 2001. "Investment and Interest Rate Policy," Journal of Economic Theory, Elsevier, vol. 98(1), pages 85-113, May.
    7. Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Timing and real indeterminacy in monetary models," Working Paper 9910R, Federal Reserve Bank of Cleveland.
    8. Richard Clarida & Jordi Gali & Mark Gertler, 2001. "Optimal Monetary Policy in Open versus Closed Economies: An Integrated Approach," American Economic Review, American Economic Association, vol. 91(2), pages 248-252, May.
    9. Martin Uribe, 1995. "Real exchange rate targeting and macroeconomic instability," International Finance Discussion Papers 505, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:
    1. Fujisaki, Seiya, 2013. "Taylor rules and equilibrium determinacy in a two-country model with non-traded goods," Economic Modelling, Elsevier, vol. 35(C), pages 597-603.
    2. Airaudo, Marco, 2012. "Endogenous Dollarization, Sovereign Risk Premia and the Taylor Principle," School of Economics Working Paper Series 2012-11, LeBow College of Business, Drexel University.

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