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Real Exchange Rate Targeting, Macroeconomic Performance and Sectoral Income Distribution in Developing Countries

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  • Marla Ripoll

Abstract

This paper uses a two-sector general equilibrium model to analyse both steady-state and stochastic dynamic effects of two real exchange rate targeting policies: a constant-target, and a band-target rule. In the model, targeting is implemented by imposing a stochastic fully-rebatable tax on the consumption of non-traded goods. The first result is that when comparing only steady states, a real exchange rate appreciation favours labour and capital in the non-traded sector, while factors in the traded sector are favoured by depreciations. A second result is that both rules reduce the volatility of investment and the trade balance. The third key result is that in the stochastic economy sectoral income distribution outcomes depend on the design of the constant and band-target rules. In particular, a variety of outcomes may be generated depending on the magnitude of the constant target, or the amplitude of the band, relative to the volatility of productivity shocks.

Suggested Citation

  • 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.
    • Handle: RePEc:taf:jitecd:v:14:y:2005:i:2:p:167-196
    DOI: 10.1080/09638190500093075
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    References listed on IDEAS

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    1. 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.
    2. Enrique G. Mendoza & Martin Uribe, 1996. "The syndrome of exchange-rate-based stabilizations and the uncertain duration of currency pegs," International Finance Discussion Papers 548, Board of Governors of the Federal Reserve System (U.S.).
    3. Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, vol. 85(1), pages 168-185, March.
    4. 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.
    5. Masao Ogaki & Jonathan D. Ostry & Carmen M. Reinhart, 1996. "Saving Behavior in Low- and Middle-Income Developing Countries: A Comparison," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 38-71, March.
    6. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
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    Cited by:

    1. Acharya, Sanjaya, 2010. "Potential impacts of the devaluation of Nepalese currency: A general equilibrium approach," Economic Systems, Elsevier, vol. 34(4), pages 413-436, December.

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