The inflationary consequences or real exchange rate targeting via accumulation of reserves

Kirill Sosunov and Oleg Zamulin
Authors registered in the RePEc Author Service: Kirill Sossounov

No 11/2006, BOFIT Discussion Papers from Bank of Finland Institute for Emerging Economies (BOFIT)

Abstract: The paper investigates the ability of monetary authorities to keep the real exchange rate undervalued over the long run by implementing a policy of accumulating foreign exchange reserves.We consider a model of a three-sector, small, open economy, where the central bank continuously purchases foreign currency reserves and compare them to Russian and Chinese economies in recent years.Both countries appear to pursue reserve accumulation policies.We find a clear trade-off between the steady state levels of the real exchange rate and inflation.After calibration, the model predicts an 8.5% real undervaluation of the Russian currency and a 13.7% undervaluation of the Chinese currency.Predicted inflation is found to match observed levels.

Keywords: Real exchange rate targeting; foreign exchange reserves; Dutch disease (search for similar items in EconPapers)
JEL-codes: E52 F4 (search for similar items in EconPapers)
Date: 2006
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: The Inflationary Consequences of Real Exchange Rate Targeting via Accumulation of Reserves (2006)
Working Paper: The Inflationary Consequences of Real Exchange Rate Targeting via Accumulation of Reserves (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofitp:bdp2006_011

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