Targeting the Real Exchange Rate: Theory and Evidence
50 Pages Posted: 15 Feb 2006
Date Written: February 1994
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