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Real Exchange Rate Targeting under Capital Controls: Can Money Provide a Nominal Anchor?

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  • Peter J. Montiel

    (International Monetary Fund)

  • Jonathan D. Ostry

    (International Monetary Fund)

Abstract

The issue of whether the money supply can serve as a nominal anchor for the domestic price level under real exchange rate targeting is examined. When capital controls are perfect, so that there is complete separation between official and unofficial foreign exchange markets, the domestic inflation rate can be stabilized, but only at the expense of a widening gap between official and parallel market exchange rates. When cross-transactions between the two markets are permitted, the domestic inflation rate cannot be stabilized either in the short run or the long run.

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.

Volume (Year): 39 (1992)
Issue (Month): 1 (March)
Pages: 58-78

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Handle: RePEc:pal:imfstp:v:39:y:1992:i:1:p:58-78

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Cited by:
  1. Reinhart, Carmen & Calvo, Guillermo & Vegh, Carlos, 1994. "Targeting the real exchange rate," MPRA Paper 13765, University Library of Munich, Germany.
  2. Shulgin, Andrey, 2006. "The Russian Foreign Exchange Policy on the Wave of Crisis Cycle," Applied Econometrics, Publishing House "SINERGIA PRESS", Publishing House "SINERGIA PRESS", vol. 4(4), pages 18-48.
  3. Ernesto H. Stein & Jeffry Frieden & Piero Ghezzi, 2000. "Politics and Exchange Rates: A Cross-Country Approach to Latin America," Research Department Publications, Inter-American Development Bank, Research Department 3119, Inter-American Development Bank, Research Department.
  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. Reinhart, Carmen & Calvo, Guillermo & Vegh, Carlos, 1994. "La tasa de cambio real como meta de política: teoría y evidencia
    [Targeting the real exchange rate: Theory and evidence]
    ," MPRA Paper 13468, University Library of Munich, Germany.
  6. Erol, Turan & Van Wijnbergen, Sweder, 1997. "Real exchange rate targeting and inflation in Turkey: An empirical analysis with policy credibility," World Development, Elsevier, Elsevier, vol. 25(10), pages 1717-1730, October.
  7. Marla Ripoll, 2005. "Real Exchange Rate Targeting, Macroeconomic Performance and Sectoral Income Distribution in Developing Countries," The Journal of International Trade & Economic Development, Taylor & Francis Journals, Taylor & Francis Journals, vol. 14(2), pages 167-196.
  8. Aivazian, Sergei & Stepanov, Vladimir & Kozlova, Maria, 2006. "Measuring the Synthetic Categories of Quality of Life in a Region and Identification of Main Trends to Improve the Social and Economic Policy (Samara Region and its Constituent Territories)," Applied Econometrics, Publishing House "SINERGIA PRESS", Publishing House "SINERGIA PRESS", vol. 2(2), pages 18-84.

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