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Real Exchange Rate Targeting Under Capital Controls

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  • Peter Montiel
  • Jonathan David Ostry

Abstract

This paper examines the issue of whether the money supply can serve as a nominal anchor for the domestic price level under real exchange rate targeting. When capital controls are perfect so that there is complete separation between official and unofficial markets for foreign exchange, 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 steady state of the model is identical to that of a model without capital controls and, hence, the money supply cannot serve as a nominal anchor for the price level in the long run. If capital controls are nevertheless maintained temporarily, and are known to be temporary, targeting the money supply fails to stabilize the rate of inflation even in the short run.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 91/68.

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Length: 25
Date of creation: 01 Jul 1991
Date of revision:
Handle: RePEc:imf:imfwpa:91/68

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Cited by:
  1. Carmen M Reinhart & Guillermo A Calvo & Carlos Vegh, 1994. "La Tasa De Cambio Real Como Meta De Política Teoría Y Evidencia," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, BANCO DE LA REPÚBLICA - ESPE.
  2. 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.
  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," MPRA Paper 13765, University Library of Munich, Germany.

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