Exchange Rate Uncertainty in Money-Based Stabilization Programs

January 1, 1998

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Format: Chicago

R. Armando Morales Exchange Rate Uncertainty in Money-Based Stabilization Programs, (USA: International Monetary Fund, 1998) accessed December 3, 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

Complementing the explanation provided by Calvo and Vegh (1994) for money-based stabilization programs, exchange rate uncertainty introduced to a particular version of the portfolio approach with imperfect competition in the banking system leads to a bias toward appreciation that is directly related to the divergence of expectations and that dampens the interaction between portfolio movements and the real exchange rate. Based on Frankel-Froot, uncertainty exists when the fundamental equilibrium real exchange rate is temporarily unknown in a foreign exchange market with two types of agents: ‘parity-guessers,’ who expect a jump to a reference parity level, and ‘money-followers,’ who expect nominal depreciation equal to the monetary rule.

Subject: Currencies, Deposit rates, Depreciation, Exchange rates, Foreign exchange, Money, National accounts, Real exchange rates

Keywords: Currencies, Currency substitution effects, Current account response, Depreciation, Exchange rate appreciation, Exchange rate dynamics, Exchange rate uncertainty, Exchange rates, Foreign currency, Imperfect competition, Opportunity cost, Program money growth, Real exchange rates, Stabilization program, WP

Publication Details

Pages:

18
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1998/003
Stock No:

WPIEA0031998
ISBN:

9781451841879
ISSN:

1018-5941

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