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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Paper provided by Center for Economic and Financial Research (CEFIR) in its series Working Papers with number
w0082.
Length: 18 pages Date of creation: Aug 2006 Date of revision: Handle: RePEc:cfr:cefirw:w0082
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Find related papers by JEL classification: E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
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References listed on IDEAS 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.:
Jeffrey Frankel, 2005.
"On the renminbi,"
CESifo Forum,
Ifo Institute for Economic Research at the University of Munich, vol. 6(3), pages 16-21, October.
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