Real Exchange Rate Dynamics in a Small, Primary-Exporting Country

Mohsin Khan and Peter Montiel

IMF Staff Papers, 1987, vol. 34, issue 4, 681-710

Abstract: Although the nominal exchange rate is often used as a policy instrument in small, primary-commodity-exporting countries, the real exchange rate is an endogenous variable that responds to both exogenous and policyinduced shocks. This paper examines the dynamic effects on the real exchange rate of various shocks, such as devaluation, fiscal and trade policies, and changes in the terms of trade and foreign real interest rates. Because the path of the real exchange rate differs for different types of shocks, nominal exchange rate policies to achieve a target real exchange rate must take these differences into account.

Date: 1987
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