Credibility and Exchange Rate Management in Developing Countries

43 Pages Posted: 15 Feb 2006

See all articles by Pierre-Richard Agenor

Pierre-Richard Agenor

University of Manchester - School of Social Sciences

Date Written: September 1991

Abstract

The paper examines the role of credibility in the conduct of exchange rate policy in developing countries. The analysis is based on a model in which policymakers are concerned about inflation and external competitiveness. Price setters in the nontraded goods sector of the economy adjust prices in reaction to anticipated fluctuations in the domestic price of tradable goods. This type of model is shown to generate a "devaluation bias" which undermines the credibility of a fixed exchange rate. The effect of reputational factors, signaling considerations, and joining a currency union as possible solutions to this bias is examined.

JEL Classification: C7, E3, F4

Suggested Citation

Agenor, Pierre-Richard, Credibility and Exchange Rate Management in Developing Countries (September 1991). IMF Working Paper, Vol. , pp. 1-43, 1991. Available at SSRN: https://ssrn.com/abstract=885036

Pierre-Richard Agenor (Contact Author)

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

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