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The Inflationary Consequences of Real Exchange Rate Targeting via Accumulation of Reserves

Kirill Sosunov and Oleg A. Zamulin
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Kirill Sosunov: Higher School of Economics

Authors registered in the RePEc Author Service: Kirill Sossounov ()

No w0082, Working Papers from Center for Economic and Financial Research (CEFIR)

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 the results to Russian and Chinese economies in recent years. Both countries appear to pursue reserve accumulation policies. We find a clear trade-o 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)
New Economics Papers: this item is included in nep-cba, nep-cis, nep-ifn, nep-mac, nep-mon and nep-tra
Date: 2006-08
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