The inflationary consequences or real exchange rate targeting via accumulation of reserves
Kirill Sosunov and
Authors registered in the RePEc Author Service: Kirill Sossounov ()
No 11/2006, BOFIT Discussion Papers from Bank of Finland, Institute for Economies in Transition
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. JEL classification: E52, F4
JEL-codes: E52 (search for similar items in EconPapers)
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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:bof:bofitp:2006_011
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