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The Inflationary Consequences of Real Exchange Rate Targeting via Accumulation of Reserves

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  • Kirill Sosunov

    (Higher School of Economics)

  • Oleg Zamulin

    ()
    (New Economic School)

Abstract

The paper investigates the ability of monetary authorities to keep the real exchange rate undervalued over the long run by implementing a policy of accumulating foreign exchange reserves. We consider a model of a three-sector, small, open economy, where the central bank continuously purchases foreign currency reserves and compare the results to Russian and Chinese economies in recent years. Both countries appear to pursue reserve accumulation policies. We find a clear trade-o between the steady state levels of the real exchange rate and inflation. After calibration, the model predicts an 8.5% real undervaluation of the Russian currency and a 13.7% undervaluation of the Chinese currency. Predicted inflation is found to match observed levels.

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Bibliographic Info

Paper provided by Center for Economic and Financial Research (CEFIR) in its series Working Papers with number w0082.

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Length: 18 pages
Date of creation: Aug 2006
Date of revision:
Handle: RePEc:cfr:cefirw:w0082

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Keywords: Real exchange rate targeting; foreign exchange reserves; Dutch disease;

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References

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  1. Oomes, Nienke & Ohnsorge, Franziska, 2005. "Money demand and inflation in dollarized economies: The case of Russia," Journal of Comparative Economics, Elsevier, vol. 33(3), pages 462-483, September.
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  4. Ariel Burstein & Martin Eichenbaum & Sergio Rebelo, 2005. "Modeling Exchange Rate Passthrough After Large Devaluations," RCER Working Papers 514, University of Rochester - Center for Economic Research (RCER).
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  9. Peter Montiel & Jonathan David Ostry, 1991. "Macroeconomic Implications of Real Exchange Rate Targeting in Developing Countries," IMF Working Papers 91/29, International Monetary Fund.
  10. Polterovich, Victor & Popov, Vladimir, 2003. "Accumulation of Foreign Exchange Reserves and Long Term Growth," MPRA Paper 20069, University Library of Munich, Germany.
  11. Ivanova Nadezhda, 2005. "Estimation of own- and cross-price elasticities of disaggregated imported and domestic goods in Russia," EERC Working Paper Series 05-13e, EERC Research Network, Russia and CIS.
  12. Dornbusch, Rudiger, 1982. "PPP Exchange-Rate Rules and Macroeconomic Stability," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(1), pages 158-65, February.
  13. Rudiger Dornbusch, 1980. "Exchange Rate Rules and Macroeconomic Stability," NBER Working Papers 0473, National Bureau of Economic Research, Inc.
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Cited by:
  1. Polbin, Andrey, 2014. "Econometric estimation of a structural macroeconomic model for the Russian economy," Applied Econometrics, Publishing House "SINERGIA PRESS", Publishing House "SINERGIA PRESS", vol. 33(1), pages 3-29.
  2. Kirill Sosunov & Oleg Zamulin, 2006. "Can Oil Prices Explain the Real Appreciation of the Russian Ruble in 1998-2005?," Working Papers w0083, Center for Economic and Financial Research (CEFIR).

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