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  • Mark P. Taylor
  • Michael J. Artis

Abstract

This paper deals with hysteresis in the desired equilibrium exchange rate (DEER) arising from misalignment. When the actual real exchange rate departs from its DEER value, current account realizations--and consequently, debt service obligations--will differ from those assumed in the initial DEER calculation, necessitating its recomputation. The paper derives a formal expression for this hysteresis effect in the DEER, studies the convergence properties of a system in which the evolution of actual exchange rates depends on the DEER and provides illustrative calculations of its historical significance. Finally, the paper derives and applies rules of thumb for computing the hysteresis effect when considering the rate of approach of an exchange rate to its DEER value.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 93/48.

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Length: 36
Date of creation: 01 Jun 1993
Date of revision:
Handle: RePEc:imf:imfwpa:93/48

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Cited by:
  1. Antoine Bouveret & Bruno Ducoudré, 2007. "On the contingency of equilibrium exchange rates with time- consistent economic policies," Documents de Travail de l'OFCE, Observatoire Francais des Conjonctures Economiques (OFCE) 2007-08, Observatoire Francais des Conjonctures Economiques (OFCE).
  2. Kateřina Šmídková & Aleš Bulíř, 2005. "Would Fast Sailing Towards the Euro Be Smooth? What Fundamental Real Exchange Rates Tell Us," Prague Economic Papers, University of Economics, Prague, University of Economics, Prague, vol. 2005(4), pages 291-316.
  3. Ray Barrell & Dawn Holland & Katerina Smidkova, 2003. "Estimates of Fundamental Real Echange Rates for the Five EU Pre- Accession Countries," Macroeconomics, EconWPA 0303016, EconWPA.
  4. Nicolas Sobczak & Céline Prigent & Hervé Joly, 1996. "Le taux de change réel d'équilibre : une introduction," Économie et Prévision, Programme National Persée, Programme National Persée, vol. 123(2), pages 1-21.
  5. Carmen Mar? Mart?ez, 2003. "Current Account Imbalances, Thriftiness And The Real Exchange Rate In A Growing Economy," UFAE and IAE Working Papers, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) 589.03, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  6. repec:spo:wpecon:info:hdl:2441/6125 is not listed on IDEAS
  7. Kateřina Šmídková & Aleš Bulíř, 2004. "Would Fast Sailing towards the Euro Be Smooth? What Fundamental Real Exchange Rates Tells Us about Acceding Economies," Working Papers IES, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies 64, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2004.

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