The Advantages of Targeting the Real Exchange Rate

Christos. C. Paraskevopoulos () and John Paschakis
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Christos. C. Paraskevopoulos: American University of Beirut and the Athenian Policy Forum, Postal: Department of Economic, Atkinson College, York University, 4700 Keels Street, Toronto, Ontario, Canada M3J 1P3
John Paschakis: American University of Beirut and the Athenian Policy Forum, Postal: American University of Beirut and the Athenian Policy Forum

Journal of Economic Integration, 2000, vol. 15, 436-459

Abstract:

This paper uses a simple open-economy macroeconomic framework to explore the implications of real exchange rate targeting for the behavior of real output, the domestic real interest rate, trade account, net foreign asset holdings, and the inflation rate. It finds that a more depreciated level of the real exchange rate decreases the domestic real interest rate and net foreign debt, and leads to a higher level of output and net exports. For inflation control, given price stick iness real exchange rate targeting may not lead to higher rates of inflation. The results are consistent with the after-effects of EMS currency re-alignment. They also imply that a "real targets approach" to exchange rate policy rather than a "nominal anchor approach" may be more appropriate for the European Union inflation-prone countries and the high inflation developing countries.

Keywords: Real Exchange Rate Ta rgeting; Foreign Exchange Market; Current account (search for similar items in EconPapers)
JEL-codes: E52 F31 F32 (search for similar items in EconPapers)
Date: 2000
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Persistent link: https://EconPapers.repec.org/RePEc:ris:integr:0140

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