Targeting the Real Exchange Rate [electronic resource] : Theory and Evidence / Carlos A Végh Gramont.
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TextSeries: IMF Working Papers; Working Paper ; No. 94/22Publication details: Washington, D.C. : International Monetary Fund, 1994Description: 1 online resource (50 p.)ISBN: 1451921217 :ISSN: 1018-5941Subject(s): Exchange Rate | Inflation Tax | Nominal Interest Rate | Real Exchange Rate | Brazil | Chile | ColombiaAdditional physical formats: Print Version:: Targeting the Real Exchange Rate : Theory and EvidenceOnline resources: IMF e-Library | IMF Book Store Abstract: This paper presents a theoretical and empirical analysis of policies aimed at setting a more depreciated level of the real exchange rate. An intertemporal optimizing model suggests that, in the absence of changes in fiscal policy, a more depreciated level of the real exchange can only be attained temporarily. This can be achieved by means of higher inflation and/or higher real interest rates, depending on the degree of capital mobility. Evidence for Brazil, Chile, and Colombia supports the model's prediction that undervalued real exchange rates are associated with higher inflation.
This paper presents a theoretical and empirical analysis of policies aimed at setting a more depreciated level of the real exchange rate. An intertemporal optimizing model suggests that, in the absence of changes in fiscal policy, a more depreciated level of the real exchange can only be attained temporarily. This can be achieved by means of higher inflation and/or higher real interest rates, depending on the degree of capital mobility. Evidence for Brazil, Chile, and Colombia supports the model's prediction that undervalued real exchange rates are associated with higher inflation.
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