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Targeting the Real Exchange Rate: Theory and Evidence

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Listed:
  • Mr. Carlos A. Végh Gramont
  • Mr. Guillermo Calvo
  • Ms. Carmen Reinhart

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.

Suggested Citation

  • Mr. Carlos A. Végh Gramont & Mr. Guillermo Calvo & Ms. Carmen Reinhart, 1994. "Targeting the Real Exchange Rate: Theory and Evidence," IMF Working Papers 1994/022, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1994/022
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    More about this item

    Keywords

    WP; nominal exchange rate; real interest rate; nominal interest rate; terms of trade; rate of inflation; capital mobility; depreciated exchange rate level; present discounted value; Real exchange rates; Inflation; Real interest rates; Exchange rates; Consumption;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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