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Targeting the Real Exchange Rate

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  • Carlos A. Végh Gramont
  • Guillermo Calvo
  • Carmen Reinhart

Abstract

This paper presents a theoretical and empirical analysis of policies aimed at setting a more depreciated level of the real exchange rate. An intertemporal optimizing model suggests that, in the absence of changes in fiscal policy, a more depreciated level of the real exchange can only be attained temporarily. This can be achieved by means of higher inflation and/or higher real interest rates, depending on the degree of capital mobility. Evidence for Brazil, Chile, and Colombia supports the model’s prediction that undervalued real exchange rates are associated with higher inflation.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 94/22.

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Length: 50
Date of creation: 01 Feb 1994
Date of revision:
Handle: RePEc:imf:imfwpa:94/22

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References

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  1. Peter Montiel & Jonathan David Ostry, 1991. "Macroeconomic Implications of Real Exchange Rate Targeting in Developing Countries," IMF Working Papers 91/29, International Monetary Fund.
  2. Miller, Stephen M., 1988. "The Beveridge-Nelson decomposition of economic time series : Another economical computational method," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 141-142, January.
  3. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  4. James H. Stock & Mark W. Watson, 1989. "A Simple MLE of Cointegrating Vectors in Higher Order Integrated Systems," NBER Technical Working Papers 0083, National Bureau of Economic Research, Inc.
  5. José Saúl Lizondo, 1993. "Real Exchange Rate Targeting Under Imperfect Asset Substitutability," IMF Working Papers 93/38, International Monetary Fund.
  6. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October.
  7. Reinhart, Carmen M. & Vegh, Carlos A., 1995. "Nominal interest rates, consumption booms, and lack of credibility: A quantitative examination," Journal of Development Economics, Elsevier, vol. 46(2), pages 357-378, April.
  8. Reinhart, Carmen & Ostry, Jonathan, 1991. "Private Saving and Terms of Trade Shocks," MPRA Paper 13716, University Library of Munich, Germany.
  9. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-72, August.
  10. Santiago Herrera Aguilera, 1991. "¿Qué Tan Grande Es El Desequilibrio Cambiario En Colombia?," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE.
  11. Reinhart, Carmen & Ostry, Jonathan, 1992. "Saving and Terms of Trade Shocks: Evidence from Developing Countries," MPRA Paper 6976, University Library of Munich, Germany.
  12. Jonathan D. Ostry & Carmen M. Reinhart, 1992. "Private Saving and Terms of Trade Shocks: Evidence from Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 495-517, September.
  13. Beveridge, Stephen & Nelson, Charles R., 1981. "A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the `business cycle'," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 151-174.
  14. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  15. Dornbusch, Rudiger, 1982. "PPP Exchange-Rate Rules and Macroeconomic Stability," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 158-65, February.
  16. Reinhart, Carmen & Vegh, Carlos, 1994. "Intertemporal consumption substitution and inflation stabilization:An empirical investigation," MPRA Paper 13427, University Library of Munich, Germany.
  17. Peter J. Montiel & Jonathan D. Ostry, 1992. "Real Exchange Rate Targeting under Capital Controls: Can Money Provide a Nominal Anchor?," IMF Staff Papers, Palgrave Macmillan, vol. 39(1), pages 58-78, March.
  18. J. Saul Lizondo, 1993. "Real Exchange Rate Targeting under Imperfect Asset Substitutability," IMF Staff Papers, Palgrave Macmillan, vol. 40(4), pages 829-851, December.
  19. Guidotti, Pablo E. & Vegh, Carlos A., 1992. "Macroeconomic interdependence under capital controls : A two-country model of dual exchange rates," Journal of International Economics, Elsevier, vol. 32(3-4), pages 353-367, May.
  20. Peter Montiel & Jonathan David Ostry, 1991. "Real Exchange Rate Targeting Under Capital Controls," IMF Working Papers 91/68, International Monetary Fund.
  21. Guilkey, David K. & Schmidt, Peter, 1989. "Extended tabulations for Dickey-Fuller tests," Economics Letters, Elsevier, vol. 31(4), pages 355-357, December.
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Cited by:
  1. Juan José Echavarría & Diego Vásquez & Mauricio Villamizar, 2005. "La tasa de cambio real en Colombia. ¿Muy lejos del equilibrio?," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE.
  2. Steven B. Kamin, 1998. "A multi-country comparison of the linkages between inflation and exchange rate competitiveness," International Finance Discussion Papers 603, Board of Governors of the Federal Reserve System (U.S.).
  3. Andrés Felipe Arias & Hernando Zuleta, 1997. "Tasa de Cambio Real e Inversión. La Experiencia de 1990-1996," BORRADORES DE ECONOMIA 003537, BANCO DE LA REPÚBLICA.
  4. Anne O. Krueger, 1997. "Nominal Anchor Exchange Rate Policies as a Domestic Distortion," NBER Working Papers 5968, National Bureau of Economic Research, Inc.
  5. Reinhart, Carmen & Vegh, Carlos, 1994. "Inflation stabilization in chronic inflation countries: The empirical evidence," MPRA Paper 13689, University Library of Munich, Germany.
  6. Martin Uribe, 2002. "Real Exchange Rate Targeting and Macroeconomic Instability," NBER Working Papers 9294, National Bureau of Economic Research, Inc.
  7. Steven B. Kamin & John H. Rogers, 1997. "Output and the real exchange rate in developing countries: an application to Mexico," International Finance Discussion Papers 580, Board of Governors of the Federal Reserve System (U.S.).
  8. Talvi, Ernesto, 1997. "Exchange rate-based stabilization with endogenous fiscal response," Journal of Development Economics, Elsevier, vol. 54(1), pages 59-75, October.
  9. Hoffmaister, Alexander W. & Roldos, Jorge E., 2001. "The Sources of Macroeconomic Fluctuations in Developing Countries: Brazil and Korea," Journal of Macroeconomics, Elsevier, vol. 23(2), pages 213-239, April.
  10. Steven B. Kamin & Marc Klau, 1997. "Some multi-country evidence on the effects of real exchange rates on output," BIS Working Papers 48, Bank for International Settlements.
  11. Reinhart, Carmen & Vegh, Carlos, 1994. "Intertemporal consumption substitution and inflation stabilization:An empirical investigation," MPRA Paper 13427, University Library of Munich, Germany.
  12. Kevin B. Grier & Fausto Hernández-Trillo, 2004. "The real exchange rate process and its real effects: The cases of Mexico and the USA," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 1-25, May.
  13. Steven B. Kamin & Marc Klau, 1998. "Some multi-country evidence on the effects of real exchange rates on output," International Finance Discussion Papers 611, Board of Governors of the Federal Reserve System (U.S.).
  14. Steven B. Kamin, 1997. "A multi-country comparison of the linkages between inflation and exchange rate competitiveness," BIS Working Papers 45, Bank for International Settlements.

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