Real Exchange Rate Targets, Nominal Exchange Rate Policies, and Inflation

Abstract

This paper examines the implications of some nominal exchange rate policies aimed at attaining a given real exchange rate target. A policy rule that sets the rate of nominal depreciation as a function of the departures of the real exchange rate from its target level is unable to achieve the target. In contrast, a policy rule that sets the change in the rate of depreciation as a function of those departures may lead the economy to the target, under certain conditions. However, this policy could also lead the economy to a process of accelerating inflation.