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The Aftermath of Appreciations

Author

Listed:
  • Ilan Goldfajn
  • Rodrigo Valdés

Abstract

This paper empirically analyzes a broad range of real exchange rate appreciation episodes. The cases are identified after compiling a large sample of monthly multilateral real exchange rates from 1960 to 1994. The objective is twofold. First, the paper studies the dynamics of appreciations, avoiding the sample selection of analyzing exclusively the crisis (or devaluation) cases. Second, the paper analyzes the mechanism by which overvaluations are corrected. In particular, we are interested in the proportion of the reversions that occur through nominal devaluations, rather than cumulative inflation differential. We calculate the probability of undoing appreciations without nominal depreciations for various degrees of misalignment. The overall conclusion is that it is very unlikely to undo large and medium appreciations without nominal devaluations.

Suggested Citation

  • Ilan Goldfajn & Rodrigo Valdés, 1997. "The Aftermath of Appreciations," Working Papers Central Bank of Chile 02, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:02
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    File URL: https://www.bcentral.cl/documents/33528/133326/DTBC_02.pdf
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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