The inflationary consequences or real exchange rate targeting via accumulation of reserves

Arbeitspapier

The paper investigates the ability of monetary authorities to keep the real exchange rate undervalued over the long run by implementing a policy of accumulating foreign exchange reserves.We consider a model of a three-sector, small, open economy, where the central bank continuously purchases foreign currency reserves and compare them to Russian and Chinese economies in recent years.Both countries appear to pursue reserve accumulation policies.We find a clear trade-off between the steady state levels of the real exchange rate and inflation.After calibration, the model predicts an 8.5% real undervaluation of the Russian currency and a 13.7% undervaluation of the Chinese currency.Predicted inflation is found to match observed levels.

Object Details

• ISBN: 952-462-830-9
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: BOFIT Discussion Papers ; No. 11/2006

Classification and Topics

• Classification: Wirtschaft ; Monetary Policy
• Subject: Real exchange rate targeting ; foreign exchange reserves ; Dutch disease

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Sosunov, Kirill ; Zamulin, Oleg
• Event: Veröffentlichung
• (who): Bank of Finland, Institute for Economies in Transition (BOFIT)
• (where): Helsinki
• (when): 2006

Further information

• Handle: http://hdl.handle.net/10419/212583
• Last update: 10.03.2025, 11:43 AM CET