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Macroeconomic Implications of Real Exchange Rate Targeting in Developing Countries

Author

Listed:
  • Peter J Montiel
  • Jonathan David Ostry

Abstract

This paper analyzes the macroeconomic effects of a variety of exogenous and policy-induced real disturbances when the authorities target the level of the real exchange rate. It first discusses the implications--particularly for inflation and the current account--of targeting the rate at an “overdepreciated” level. The paper then examines the dynamic response of both output and inflation to a number of shocks. Further applications of the model, particularly as regards fiscal explanations of inflation, high-inflation plateaus, and money-based stabilization programs, are also considered.

Suggested Citation

  • Peter J Montiel & Jonathan David Ostry, 1991. "Macroeconomic Implications of Real Exchange Rate Targeting in Developing Countries," IMF Working Papers 91/29, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:91/29
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    Cited by:

    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. Carmen M Reinhart & Vincent R Reinhart, 1991. "Fluctuaciones Del Producto Y Choques Monetarios: Evidencia Colombiana," Revista ESPE - ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 10(20), pages 53-85, December.
    3. Carmen M Reinhart & Guillermo A Calvo & Carlos Vegh, 1994. "La Tasa De Cambio Real Como Meta De Política Teoría Y Evidencia," Revista ESPE - ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 13(25), pages 7-50, June.
    4. Cunha, Alexandre Barros da, 2001. "What is Behind the Brazilian Stabilization?," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 55(1), January.
    5. Bouoiyour, Jamal & Marimoutou, Velayoudoum & Rey, Serge, 2003. "Trends non linéaires et co-trending dans le taux de change réel effectif du dinar tunisien
      [Nonlinear trend and co-trending in the Tunisian real effective exchange rate]
      ," MPRA Paper 30249, University Library of Munich, Germany.
    6. Roberto Junguito & Hernando Vargas, 1996. "Central Bank Independence and Foreign Exchange Policies in Latin America," Borradores de Economia 046, Banco de la Republica de Colombia.
    7. Calvo, Guillermo A. & Vegh, Carlos A., 1999. "Inflation stabilization and bop crises in developing countries," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 24, pages 1531-1614 Elsevier.
    8. Steven B. Kamin, 1998. "A multi-country comparison of the linkages between inflation and exchange rate competitiveness," International Finance Discussion Papers 603, Board of Governors of the Federal Reserve System (U.S.).
    9. International Monetary Fund, 2005. "Algeria; Selected Issues," IMF Staff Country Reports 05/52, International Monetary Fund.
    10. Ndung'u, N.S., 1999. "Monetary and Exchange Rate Policy in Kenya," Papers 94, African Economic Research Consortium.
    11. Sosunov, Kirill & Zamulin, Oleg, 2006. "The inflationary consequences or real exchange rate targeting via accumulation of reserves," BOFIT Discussion Papers 11/2006, Bank of Finland, Institute for Economies in Transition.
    12. BEN ALI Mohamed Sami, 2006. "Capital Account Liberalization And Exchange Rate Regime Choice, What Scope For Flexibility In Tunisia?," William Davidson Institute Working Papers Series wp815, William Davidson Institute at the University of Michigan.
    13. Carmen M. Reinhart & Vincent R. Reinhart, 1991. "Output Fluctuations and Monetary Shocks: Evidence from Colombia," IMF Staff Papers, Palgrave Macmillan, vol. 38(4), pages 705-735, December.
    14. International Monetary Fund, 2002. "Tunisia’s Experience with Real Exchange Rate Targeting and the Transition to a Flexible Exchange Rate Regime," IMF Working Papers 02/190, International Monetary Fund.
    15. Jácome Hidalgo, Luis, 1994. "De la inflación crónica a la inflación moderada en el Ecuador," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), April.
    16. Steven B. Kamin, 1997. "A multi-country comparison of the linkages between inflation and exchange rate competitiveness," BIS Working Papers 45, Bank for International Settlements.
    17. Fatma Marrakchi Charfi, 2008. "Equilibrium real exchange rate and misalignments : Lessons from a VAR-ECM model applied to Tunisia," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 55(4), pages 439-464, December.
    18. Taline Koranchelian, 2005. "The Equilibrium Real Exchange Rate in a Commodity Exporting Country; Algeria’s Experience," IMF Working Papers 05/135, International Monetary Fund.
    19. 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.
    20. Artus P., 2001. "What Exchange - Rate System For Emerging Countries?," European Research Studies Journal, European Research Studies Journal, vol. 0(1-2), pages 27-60, January -.

    More about this item

    Keywords

    Inflation; exchange rate; real exchange rate; terms of trade; rate of inflation;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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