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The inflationary consequences or real exchange rate targeting via accumulation of reserves

Kirill Sosunov and Oleg Zamulin
Authors registered in the RePEc Author Service: Kirill Sossounov ()

No 11/2006, BOFIT Discussion Papers from Bank of Finland, Institute for Economies in Transition

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 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)
Date: 2006-10-31
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Working Paper: The Inflationary Consequences of Real Exchange Rate Targeting via Accumulation of Reserves (2006) Downloads
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