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

Authors

  • J. Saúl Lizondo Research Department, International Monetary Fund image/svg+xml

Keywords:

real exchange rate, nominal exchange rate, exchange rate policy, inflation, crawling peg, stabilization programs

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.

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References

Adams, C., & Gros, D. (1986). The consequences of real exchange rate rules for inflation: Some illustrative examples. IMF Staff Papers, 33(3), 439–476. https://doi.org/10.2307/3867251

Buiter, W. (1987). A fiscal theory of hyperdeflations? Some surprising monetarist arithmetic. Oxford Economic Papers, 39(1), 111–118. https://doi.org/10.1093/oxfordjournals.oep.a041772

Dornbusch, R. (1982). PPP exchange-rate rules and macroeconomic stability. Journal of Political Economy, 90(1), 158–165. https://doi.org/10.1086/261044

Kiguel, M. A. (1989). Budget deficits, stability, and the monetary dynamics of hyperinflation. Journal of Money, Credit and Banking, 21(2), 148–157.

Olivera, J. (1967). Money, prices, and fiscal lags: A note on the dynamics of inflation. Banca Nazionale del Lavoro Quarterly Review, 20, 258–267.

Rodríguez, C. A. (1981). Managed float: An evaluation of alternative rules in the presence of speculative capital flows. American Economic Review, 71(1), 256–260.

Tanzi, V. (1977). Inflation, lags in collection, and the real value of tax revenue. IMF Staff Papers, 24(1), 154–167. https://doi.org/10.2307/3866540

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Published

1991-04-30

How to Cite

Lizondo, J. S. (1991). Real Exchange Rate Targets, Nominal Exchange Rate Policies, and Inflation. Economic Analysis Review, 6(1), 5–21. Retrieved from https://www.rae-ear.org/index.php/rae/article/view/234

Issue

Vol. 6 No. 1 (1991)

Section

Articles

License

Copyright (c) 1991 J. Saúl Lizondo

Creative Commons License

This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

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