Targeting the Real Exchange Rate: Theory and Evidence

Reinhart, Carmen; Végh, Carlos

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Targeting the Real Exchange Rate: Theory and Evidence

IMF Working Paper No. 94/22

50 Pages Posted: 15 Feb 2006

See all articles by Carmen Reinhart

Carmen Reinhart

Harvard University - Center for Business and Government; Centre for Economic Policy Research (CEPR); World Bank; University of Maryland - School of Public Affairs; National Bureau of Economic Research (NBER); International Monetary Fund (IMF); Peterson Institute for International Economics; Harvard University, Harvard Kennedy School (HKS), Belfer Center for Science and International Affairs (BCSIA) ; Harvard University - Harvard Kennedy School (HKS)

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: Suggested Citation

Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Végh, Carlos, Targeting the Real Exchange Rate: Theory and Evidence (February 1994). IMF Working Paper No. 94/22, Available at SSRN: https://ssrn.com/abstract=883453