Real Exchange Rate Targeting and Macroeconomic Instability

33 Pages Posted: 25 Oct 2002

See all articles by Martín Uribe

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 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.

Suggested Citation

Uribe, Martin, Real Exchange Rate Targeting and Macroeconomic Instability (October 2002). NBER Working Paper No. w9294, Available at SSRN: https://ssrn.com/abstract=344878

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