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Analysis of large real exchange rate appreciation episodes

Listed author(s):
  • Zsolt Darvas


    (Magyar Nemzeti Bank (at the time of writing the study))

In the past three decades several countries of the world have experienced fast and large real exchange rate appreciation, similarly to the recent Hungarian experience. This paper studies macroeconomic policies and outcomes during and after large real exchange rate appreciations. The two main lessons of the paper stresses the importance of the equilibrium real exchange rate and of macroeconomic policies. First, the magnitude of the appreciation itself is not informative to the possible consequences as the relation the to equilibrium real rate matters. Second, macroeconomic policies have a determinant effect on outcomes. For example, in those floating exchange rate regimes when the real exchange rate appreciation proved to be transitory but lead to a permanent reduction of inflation and the external balance did not deteriorate during the appreciation and the output loss was less pronounced than in many exchange-rate based stabilizations, fiscal policies tightened during the appreciation period and nominal wage growth declined parallel with falling inflation.

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Paper provided by Magyar Nemzeti Bank (Central Bank of Hungary) in its series MNB Background Studies (discontinued) with number 2003/2.

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Length: 61 pages
Date of creation: 2003
Handle: RePEc:mnb:backgr:2003/2
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