Exchange Rate Uncertainty in Money-Based Stabilization Programs
Armando Morales Bueno
International Monetary Fund (IMF) - Monetary and Exchange Affairs Department
IMF Working Paper No. 98/3
Complementing the explanation provided by Calvo and Vegh (1994) for money-based stabilization programs, exchange rate uncertainty introduced to a particular version of the portfolio approach with imperfect competition in the banking system leads to a bias toward appreciation that is directly related to the divergence of expectations and that dampens the interaction between portfolio movements and the real exchange rate. Based on Frankel-Froot, uncertainty exists when the fundamental equilibrium real exchange rate is temporarily unknown in a foreign exchange market with two types of agents: `parity-guessers,` who expect a jump to a reference parity level, and `money-followers,` who expect nominal depreciation equal to the monetary rule.
Number of Pages in PDF File: 18
Keywords: Exchange rate uncertainty, Stabilization Programs
JEL Classification: E44, F31working papers series
Date posted: February 15, 2006
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