Real Exchange Rate Targeting, Macroeconomic Performance and Sectoral Income Distribution in Developing Countries
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.
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Volume (Year): 14 (2005)
Issue (Month): 2 ()
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