Targeting the Real Exchange Rate: Theory and Evidence

Carlos Végh Gramont, Guillermo Calvo and Carmen Reinhart

No 1994/022, IMF Working Papers from International Monetary Fund

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.

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 (search for similar items in EconPapers)
Pages: 50
Date: 1994-02-01
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Citations: View citations in EconPapers (26)

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Related works:
Journal Article: Targeting the real exchange rate: theory and evidence (1995)
Working Paper: Targeting the real exchange rate: Theory and evidence (1994)
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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:1994/022

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