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The Aftermath of Appreciations

  • Ilan Goldfajn
  • Rodrigo O. Valdes

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 differentials. 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.

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File URL: http://www.nber.org/papers/w5650.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5650.

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Date of creation: Jul 1996
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Publication status: published as Quarterly Journal of Economics, Vol. 114, no. 1 (February 1999): 229-262.
Handle: RePEc:nbr:nberwo:5650
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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Web page: http://www.nber.org
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  1. Atish R. Ghosh & Anne-Marie Gulde & Jonathan D. Ostry & Holger C. Wolf, 1997. "Does The Nominal Exchange Rate Regime Matter?," Working Papers 97-09, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. Kenneth A. Froot & Kenneth Rogoff, 1994. "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Working Papers 4952, National Bureau of Economic Research, Inc.
  3. Sergio Rebelo & Carlos A. Vegh, 1995. "Real Effects of Exchange Rate-Based Stabilization: An Analysis of Competing Theories," NBER Working Papers 5197, National Bureau of Economic Research, Inc.
  4. Jeffrey A. Frankel & Andrew K. Rose, 1995. "A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries," NBER Working Papers 5006, National Bureau of Economic Research, Inc.
  5. Barry Eichengreen, Andrew K. Rose, and Charles Wyplosz., 1995. "Speculative Attacks on Pegged Exchange Rates: An Empirical Exploration with Special Reference to the European Monetary System," Center for International and Development Economics Research (CIDER) Working Papers C95-046, University of California at Berkeley.
  6. Klein, Michael W. & Marion, Nancy P., 1997. "Explaining the duration of exchange-rate pegs," Journal of Development Economics, Elsevier, vol. 54(2), pages 387-404, December.
  7. Rudiger Dornbusch, 1985. "Purchasing Power Parity," NBER Working Papers 1591, National Bureau of Economic Research, Inc.
  8. Jonathan David Ostry & Anne Marie Gulde & Atish R. Ghosh & Holger C. Wolf, 1995. "Does the Nominal Exchange Rate Regime Matter?," IMF Working Papers 95/121, International Monetary Fund.
  9. Rudger Dornbusch & Ilan Goldfajn & Rodrigo O. Valdés, 1995. "Currency Crises and Collapses," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 219-294.
  10. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency Crashes in Emerging Markets: Empirical Indicators," NBER Working Papers 5437, National Bureau of Economic Research, Inc.
  11. John Williamson, 1994. "Estimating Equilibrium Exchange Rates," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 17, May.
  12. Dornbusch, Rudiger, 1974. "Tariffs and nontraded goods," Journal of International Economics, Elsevier, vol. 4(2), pages 177-185, May.
  13. Paul Krugman, 1996. "Are Currency Crises Self-Fulfilling?," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 345-407 National Bureau of Economic Research, Inc.
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