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Targeting the Real Exchange Rate: Theory and Evidence
Author:
Mr. Carlos A. Végh Gramont null

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Mr. Guillermo Calvo null

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Ms. Carmen Reinhart null

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Series:
IMF Working Papers
Volume/Issue:
Volume 1994: Issue 022
Language:
English
Publication Date:
01 Feb 1994
DOI:
https://doi.org/10.5089/9781451921212.001
ISBN:
9781451921212
ISSN:
1018-5941
Pages:
50
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
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund