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Real Exchange Rate Targeting and Macroeconomic Instability

32 Pages Posted: 7 Sep 2000  

Martín Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: October 23, 2002

Abstract

Using an optimizing model of a small open economy, this paper studies the macroeconomic effects of PPP rules whereby the government increases the devaluation rate when the real exchange rate - defined as the price of tradables in terms of nontradables - is below its long-run level and reduces the devaluation rate when the real exchange rate is above its long-run level. The paper shows that the mere existence of such a rule can generate aggregate fluctuations due to self-fulfilling revisions in expectations. The result is shown to obtain in both flexible- and sticky-price environments.

Keywords: real exchange rate targeting, sunspot equilibria, indeterminacy

JEL Classification: F41

Suggested Citation

Uribe, Martín, Real Exchange Rate Targeting and Macroeconomic Instability (October 23, 2002). Available at SSRN: https://ssrn.com/abstract=231636 or http://dx.doi.org/10.2139/ssrn.231636

Martin Uribe (Contact Author)

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