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Real Exchange Rate Targeting under Capital Controls: Can Money Provide a Nominal Anchor?

Author

Listed:
  • Peter J. Montiel

    (International Monetary Fund)

  • Jonathan D. Ostry

    (International Monetary Fund)

Abstract

The issue of whether the money supply can serve as a nominal anchor for the domestic price level under real exchange rate targeting is examined. When capital controls are perfect, so that there is complete separation between official and unofficial foreign exchange markets, 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 domestic inflation rate cannot be stabilized either in the short run or the long run.

Suggested Citation

  • 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.
    • Handle: RePEc:pal:imfstp:v:39:y:1992:i:1:p:58-78
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    Cited by:

    1. 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, vol. 14(2), pages 167-196.
    2. Guillermo Calvo & Carmen Reinhart & Carlos Végh, 1994. "La tasa de cambio real como meta de política: teoría y evidencia," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República, vol. 13(25), pages 7-50, June.
    3. Aivazian, Sergei & Stepanov, Vladimir & Kozlova, Maria, 2006. "Measuring the Synthetic Categories of Quality of Life in a Region and Identification of Main Trends to Improve the Social and Economic Policy (Samara Region and its Constituent Territories)," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 2(2), pages 18-84.
    4. 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.
    5. Ernesto H. Stein & Jeffry Frieden & Piero Ghezzi, 2000. "Politics and Exchange Rates: A Cross-Country Approach to Latin America," Research Department Publications 3119, Inter-American Development Bank, Research Department.
    6. Erol, Turan & Van Wijnbergen, Sweder, 1997. "Real exchange rate targeting and inflation in Turkey: An empirical analysis with policy credibility," World Development, Elsevier, vol. 25(10), pages 1717-1730, October.
    7. Shulgin, Andrey, 2006. "The Russian Foreign Exchange Policy on the Wave of Crisis Cycle," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 4(4), pages 18-48.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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