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Real Exchange Rate Targeting and Macroeconomic Instability

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Author Info
Martin Uribe

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Abstract

Using an optimizing model of a small open economy, this paper studies the macroeconomic effects of PPP rules whereby the government increases the devaluation rate when the real exchange rate defined as the price of tradables in terms of nontradables is below its long-run level and reduces the devaluation rate when the real exchange rate is above its long-run level. The paper shows that the mere existence of such a rule can generate aggregate fluctuations due to self-fulfilling revisions in expectations. The result is shown to obtain in both flexible- and sticky-price environments.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9294.

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Date of creation: Oct 2002
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Handle: RePEc:nbr:nberwo:9294

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Find related papers by JEL classification:
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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.:

  1. 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. [Downloadable!] (restricted)
  2. Mendoza, Enrique G. & Uribe, Martin, 2000. "Devaluation risk and the business-cycle implications of exchange-rate management," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 53(1), pages 239-296, December. [Downloadable!] (restricted)
  3. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November. [Downloadable!] (restricted)
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  4. Sergio Rebelo & Carlos A. Vegh, 1995. "Real Effects of Exchange-Rate-Based Stabilization: An Analysis of Competing Theories," NBER Chapters, in: NBER Macroeconomics Annual 1995, Volume 10, pages 125-188 National Bureau of Economic Research, Inc. [Downloadable!]
    Other versions:
  5. Calvo, Guillermo A. & Reinhart, Carmen M. & Vegh, Carlos A., 1995. "Targeting the real exchange rate: theory and evidence," Journal of Development Economics, Elsevier, vol. 47(1), pages 97-133, June. [Downloadable!] (restricted)
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  6. 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. [Downloadable!] (restricted)
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  7. Arrau, Patricio & De Gregorio, Jose & Reinhart, Carmen & Wickham, Peter, 1991. "The demand for money in developing countries : assessing the role of financial innovation," Policy Research Working Paper Series 721, The World Bank. [Downloadable!]
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  8. Reinhart, Carmen & Ostry, Jonathan, 1991. "Private Saving and Terms of Trade Shocks," MPRA Paper 13716, University Library of Munich, Germany. [Downloadable!]
  9. Uribe, Martin, 1997. "Hysteresis in a simple model of currency substitution," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 185-202, September. [Downloadable!] (restricted)
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  10. Tjalling C. Koopmans, 1959. "Stationary Ordinal Utility and Impatience," Cowles Foundation Discussion Papers 81, Cowles Foundation, Yale University. [Downloadable!]
  11. Klein, Michael W. & Marion, Nancy P., 1997. "Explaining the duration of exchange-rate pegs," Journal of Development Economics, Elsevier, vol. 54(2), pages 387-404, December. [Downloadable!] (restricted)
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  12. Rudiger Dornbusch, 1980. "Exchange Rate Rules and Macroeconomic Stability," NBER Working Papers 0473, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany. [Downloadable!]
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  14. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Kirill Sosunov & Oleg Zamulin, 2007. "Monetary Policy in an Economy Sick with Dutch Disease," Working Papers w0101, Center for Economic and Financial Research (CEFIR). [Downloadable!]
    Other versions:
  2. Luis-Felipe Zanna, 2004. "PPP rules, macroeconomic (In)stability and learning," International Finance Discussion Papers 814, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  3. James Bullard & Eric Schaling, 2006. "Monetary policy, determinacy, and learnability in the open economy," Working Paper Series 611, European Central Bank. [Downloadable!]
    Other versions:
  4. Fabrizio CORICELLI & Bostjan JAZBEC & Igor MASTEN, 2004. "Exchange Rate Pass-Through in Acceding Countries: The Role of Exchange Rate Regimes," Economics Working Papers ECO2004/16, European University Institute. [Downloadable!]
  5. Francesco Menoncin & Marco Tronzano, . "Optimal real exchange rate targeting: a stochastic analysis," Working Papers ubs0401, University of Brescia, Department of Economics. [Downloadable!]
  6. Fabrizio Coricelli & Boštjan Jazbec & Igor Masten, 2004. "Exchange Rate Policy and Inflation in Acceding Countries: The Role of Pass-through," William Davidson Institute Working Papers Series 2004-674, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  7. James B. Bullard & Eric Schaling, 2006. "Monetary policy, determinacy, and learnability in a two-block world economy," Working Papers 2006-038, Federal Reserve Bank of St. Louis. [Downloadable!]
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