Credibility and Exchange Rate Management in Developing Countries

Pierre-Richard Agénor

No 1991/087, IMF Working Papers from International Monetary Fund

Abstract: The paper examines the role of credibility in the conduct of exchange rate policy in developing countries, The analysis is based on a model in which policymakers are concerned about inflation and external competitiveness. Price setters in the nontraded goods sector of the economy adjust prices in reaction to anticipated fluctuations in the domestic price of tradable goods. This type of model is showm to generate a “devaluation bias” which undermines the credibility of a fixed exchange rate. The effect of reputational factors, signaling considerations, and joining a currency union as possible solutions to this bias is examined.

Keywords: WP; exchange rate; zero-devaluation rule; no-devaluation equilibrium; devaluation expectation; nontradable price; exchange rate commitment; no-devaluation rule; discretionary exchange rate adjustment; exchange rate target; second-period exchange rate expectation; discretionary exchange rate change; exchange rate union; exchange rate expectation; Exchange rates; Conventional peg; Real exchange rates; Exchange rate policy; Inflation; Caribbean (search for similar items in EconPapers)
Pages: 43
Date: 1991-09-01
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Citations: View citations in EconPapers (3)

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Journal Article: Credibility and exchange rate management in developing countries (1994)
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