IMF Working Papers

Credibility and Exchange Rate Management in Developing Countries

By Pierre-Richard Agénor

September 1, 1991

Preview Citation

Format: Chicago

Pierre-Richard Agénor. Credibility and Exchange Rate Management in Developing Countries, (USA: International Monetary Fund, 1991) accessed November 23, 2024
Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The paper examines the role of credibility in the conduct of exchange rate policy in developing countries, The analysis is based on a model in which policymakers are concerned about inflation and external competitiveness. Price setters in the nontraded goods sector of the economy adjust prices in reaction to anticipated fluctuations in the domestic price of tradable goods. This type of model is showm to generate a “devaluation bias” which undermines the credibility of a fixed exchange rate. The effect of reputational factors, signaling considerations, and joining a currency union as possible solutions to this bias is examined.

Subject: Conventional peg, Exchange rate policy, Exchange rates, Foreign exchange, Inflation, Prices, Real exchange rates

Keywords: Caribbean, Conventional peg, Devaluation expectation, Discretionary exchange rate adjustment, Discretionary exchange rate change, Exchange rate, Exchange rate commitment, Exchange rate expectation, Exchange rate policy, Exchange rate target, Exchange rate union, Exchange rates, Inflation, No-devaluation equilibrium, No-devaluation rule, Nontradable price, Real exchange rates, Second-period exchange rate expectation, WP, Zero-devaluation rule

Publication Details

  • Pages:

    43

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 1991/087

  • Stock No:

    WPIEA0871991

  • ISBN:

    9781451850925

  • ISSN:

    1018-5941

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