ESCAPE CLAUSES AND TARGETING OF THE REAL EXCHANGE RATE: THE CASE OF NOMINAL EXCHANGE RATE PEGGING

We consider an economy under a fixed exchange rate system, but with bounds (a minimum level or a band) on the real exchange rate. The international price of the tradable good is characterized by the continuous arrival of shocks that change its level. In a model with microfoundations, we investigate...

Descripción completa

Guardado en:

Detalles Bibliográficos
Autor principal:	GONZALEZ M,PABLO
Lenguaje:	English
Publicado:	ILADES. Universidad Alberto Hurtado. 2010
Materias:	Real exchange rate targeting escape clauses
Acceso en línea:	http://www.scielo.cl/scielo.php?script=sci_arttext&pid=S0718-88702010000100005
Etiquetas:	Agregar Etiqueta Sin Etiquetas, Sea el primero en etiquetar este registro!

id	oai:scielo:S0718-88702010000100005
record_format	dspace
spelling	oai:scielo:S0718-887020100001000052011-04-29ESCAPE CLAUSES AND TARGETING OF THE REAL EXCHANGE RATE: THE CASE OF NOMINAL EXCHANGE RATE PEGGINGGONZALEZ M,PABLO Real exchange rate targeting escape clauses We consider an economy under a fixed exchange rate system, but with bounds (a minimum level or a band) on the real exchange rate. The international price of the tradable good is characterized by the continuous arrival of shocks that change its level. In a model with microfoundations, we investigate the effects of targeting the real exchange rate through nominal exchange rate changes that preclude the real exchange from trespassing the imposed bounds. A stochastic general equilibrium model with two goods and fixed non-tradable goods price level is developed. We analyze the cases in which a lower bound or a band on the real exchange rate is introduced. The general conclusion is that when bounds are established, then welfare effects can be expected, which are generated at the expense of the levels of consumption that go in the opposite direction than what the policy intended. This short-run effect is present even in the case the targeting policy is never exercised. This result is similar to the one we find in the target zones literature, in the sense that just the existence of this tolerance band changes the behavior of the economy. An interesting result is that, in the case in which home goods prices are fixed, the imposition of the band on the real exchange rate does not change its behavior within the band. However, this result is not true of other real variables in the economy. In other words, although the targeted variable within the band behaves identically to the case in which there are no bounds, the rest of the real variables in the economy behave differently, even if the targeted variable remains within the band and the escape clause is not triggered.info:eu-repo/semantics/openAccessILADES. Universidad Alberto Hurtado.Revista de análisis económico v.25 n.1 20102010-06-01text/htmlhttp://www.scielo.cl/scielo.php?script=sci_arttext&pid=S0718-88702010000100005en10.4067/S0718-88702010000100005
institution	Scielo Chile
collection	Scielo Chile
language	English
topic	Real exchange rate targeting escape clauses
spellingShingle	Real exchange rate targeting escape clauses GONZALEZ M,PABLO ESCAPE CLAUSES AND TARGETING OF THE REAL EXCHANGE RATE: THE CASE OF NOMINAL EXCHANGE RATE PEGGING
description	We consider an economy under a fixed exchange rate system, but with bounds (a minimum level or a band) on the real exchange rate. The international price of the tradable good is characterized by the continuous arrival of shocks that change its level. In a model with microfoundations, we investigate the effects of targeting the real exchange rate through nominal exchange rate changes that preclude the real exchange from trespassing the imposed bounds. A stochastic general equilibrium model with two goods and fixed non-tradable goods price level is developed. We analyze the cases in which a lower bound or a band on the real exchange rate is introduced. The general conclusion is that when bounds are established, then welfare effects can be expected, which are generated at the expense of the levels of consumption that go in the opposite direction than what the policy intended. This short-run effect is present even in the case the targeting policy is never exercised. This result is similar to the one we find in the target zones literature, in the sense that just the existence of this tolerance band changes the behavior of the economy. An interesting result is that, in the case in which home goods prices are fixed, the imposition of the band on the real exchange rate does not change its behavior within the band. However, this result is not true of other real variables in the economy. In other words, although the targeted variable within the band behaves identically to the case in which there are no bounds, the rest of the real variables in the economy behave differently, even if the targeted variable remains within the band and the escape clause is not triggered.
author	GONZALEZ M,PABLO
author_facet	GONZALEZ M,PABLO
author_sort	GONZALEZ M,PABLO
title	ESCAPE CLAUSES AND TARGETING OF THE REAL EXCHANGE RATE: THE CASE OF NOMINAL EXCHANGE RATE PEGGING
title_short	ESCAPE CLAUSES AND TARGETING OF THE REAL EXCHANGE RATE: THE CASE OF NOMINAL EXCHANGE RATE PEGGING
title_full	ESCAPE CLAUSES AND TARGETING OF THE REAL EXCHANGE RATE: THE CASE OF NOMINAL EXCHANGE RATE PEGGING
title_fullStr	ESCAPE CLAUSES AND TARGETING OF THE REAL EXCHANGE RATE: THE CASE OF NOMINAL EXCHANGE RATE PEGGING
title_full_unstemmed	ESCAPE CLAUSES AND TARGETING OF THE REAL EXCHANGE RATE: THE CASE OF NOMINAL EXCHANGE RATE PEGGING
title_sort	escape clauses and targeting of the real exchange rate: the case of nominal exchange rate pegging
publisher	ILADES. Universidad Alberto Hurtado.
publishDate	2010
url	http://www.scielo.cl/scielo.php?script=sci_arttext&pid=S0718-88702010000100005
work_keys_str_mv	AT gonzalezmpablo escapeclausesandtargetingoftherealexchangeratethecaseofnominalexchangeratepegging
_version_	1714206205004480512

ESCAPE CLAUSES AND TARGETING OF THE REAL EXCHANGE RATE: THE CASE OF NOMINAL EXCHANGE RATE PEGGING

Ejemplares similares