This paper focuses on a monetary explanation of real exchange rate fluctuations, namely capital flight provoked by the process of currency substitution. Under fixed exchange rates, capital inflows to reconstitute domestic money holdings produce a positive liquidity effect due to the creation of inside money by the financial system. This can initially lead to an exchange rate appreciation, through an increase in the price of nontradables, and a current account deficit. A process of deflation must then ensue to converge to the new steady state equilibrium.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Find related papers by JEL classification: F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)