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Ppp Exchange Rate Rules, Macroeconomic (In)Stability, And Learning

  • Luis-Felipe Zanna
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    In order to maintain competitiveness, governments in developing economies seem to have pursued purchasing power parity (PPP) exchange rate rules, by adjusting the nominal devaluation rate in response to real exchange rate deviations from an intermediate target. This article shows that these rules are likely to induce macroeconomic instability, as they generate sunspot-driven fluctuations that are in fact learnable by agents in the Expectational-Stability sense. It finds that the existence of these "learnable sunspots" depends, among others, on open economy features, including the degree of openness and the degree of exchange rate pass-through to consumer's import prices. Copyright � (2009) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-2354.2009.00561.x
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    Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

    Volume (Year): 50 (2009)
    Issue (Month): 4 (November)
    Pages: 1103-1128

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    Handle: RePEc:ier:iecrev:v:50:y:2009:i:4:p:1103-1128
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    1. Richard Clarida & Jordi Gali & Mark Gertler, 2001. "Optimal Monetary Policy in Open versus Closed Economies: An Integrated Approach," American Economic Review, American Economic Association, vol. 91(2), pages 248-252, May.
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