NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Real Exchange Rate Targeting and Macroeconomic Instability

Martin Uribe

NBER Working Paper No. 9294
Issued in October 2002
NBER Program(s):   EFG   IFM

Using an optimizing model of a small open economy, this paper studies the macroeconomic effects of PPP rules whereby the government increases the devaluation rate when the real exchange rate defined as the price of tradables in terms of nontradables is below its long-run level and reduces the devaluation rate when the real exchange rate is above its long-run level. The paper shows that the mere existence of such a rule can generate aggregate fluctuations due to self-fulfilling revisions in expectations. The result is shown to obtain in both flexible- and sticky-price environments.

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Document Object Identifier (DOI): 10.3386/w9294

Published: Uribe, Martin. "Real Exchange Rate Targeting And Macroeconomic Instability," Journal of International Economics, 2003, v59(1,Jan), 137-159. citation courtesy of

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