Targeting the Real Exchange Rate: Theory and Evidence

50 Pages Posted: 15 Feb 2006

See all articles by Carmen M. Reinhart

Carmen M. Reinhart

Peter G. Peterson Institute for International Economics; National Bureau of Economic Research (NBER)

Carlos Végh

affiliation not provided to SSRN

Date Written: February 1994

Abstract

This paper presents a theoretical and empirical analysis of policies aimed at setting a more depreciated level of the real exchange rate. An intertemporal optimizing model suggests that, in the absence of changes in fiscal policy, a more depreciated level of the real exchange can only be attained temporarily. This can be achieved by means of higher inflation and/or higher real interest rates, depending on the degree of capital mobility. Evidence for Brazil, Chile, and Colombia supports the model`s prediction that undervalued real exchange rates are associated with higher inflation.

JEL Classification: E52, F40

Suggested Citation

Reinhart, Carmen M. and Végh, Carlos, Targeting the Real Exchange Rate: Theory and Evidence (February 1994). IMF Working Paper, Vol. , pp. 1-50, 1994. Available at SSRN: https://ssrn.com/abstract=883453

Carmen M. Reinhart

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Carlos Végh

affiliation not provided to SSRN

No Address Available

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