NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Aftermath of Appreciations

Ilan Goldfajn, Rodrigo O. Valdes

NBER Working Paper No. 5650
Issued in July 1996

This paper empirically analyzes a broad range of real exchange rate appreciation episodes. The cases are identified after compiling a large sample of monthly multilateral real exchange rates from 1960 to 1994. The objective is twofold. First, the paper studies the dynamics of appreciations, avoiding the sample selection of analyzing exclusively the crisis (or devaluation) cases. Second, the paper analyzes the mechanism by which overvaluations are corrected. In particular, we are interested in the proportion of the reversions that occur through nominal devaluations, rather than cumulative inflation differentials. We calculate the probability of undoing appreciations without nominal depreciations for various degrees of misalignment. The overall conclusion is that it is very unlikely to undo large and medium appreciations without nominal devaluations.

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Document Object Identifier (DOI): 10.3386/w5650

Published: Quarterly Journal of Economics, Vol. 114, no. 1 (February 1999): 229-262. citation courtesy of

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