This series aims to make available to the general public and to economic policy practitioners, a selection of policy papers prepared by the staff of the International Monetary Fund. Papers in the International Economic Policy Review will offer specific policy-relevant analysis, but at a relatively non-technical level. These papers are intended to provide analytical background for IMF-supported programs and more generally to shed light on a range of policy choices facing ministries and central banks.
Real exchange rate rules have recently been adopted by a number of developing countries as a means of maintaining international competitiveness in the face of high domestic rates of inflation. The conventional wisdom holds that such rules will quickly lead to hyperinflation, an outcome that is not consistent with the experience of at least some of the countries that have adopted them. This paper shows how real exchange rate rules can easily have destabilizing effects on the inflation rate without leading to hyperinflation, and shows that such effects are difficult to overcome even when supplemented by an appropriate money-supply rule.
You are not logged in and do not have access to this content. Please login or, to subscribe to IMF eLibrary, please click here