External Shocks and Inflation in Developing Countries Under a Real Exchange Rate Rule

By Jonathan David Ostry, Peter J Montiel

September 1, 1992

Preview Citation

Format: Chicago

Jonathan David Ostry, and Peter J Montiel. External Shocks and Inflation in Developing Countries Under a Real Exchange Rate Rule, (USA: International Monetary Fund, 1992) accessed October 6, 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

This paper shows that the response of inflation to external shocks is very different when the authorities target the real exchange rate than when they follow a fixed exchange rate or a preannounced crawling peg. Specifically, shocks that would have no effect on the steady-state inflation rate under a fixed exchange rate are either inflationary or deflationary under a real exchange rate rule. Moreover, irrespective of the degree of capital mobility, the authorities will find it difficult to mitigate the destabilizing effects of real shocks on the price level by using monetary policy, except possibly in the very short run.

Subject: Capital controls, Inflation, Monetary base, Real exchange rates, Terms of trade

Keywords: Exchange rate, Mn mathvariant, WP

Publication Details

Pages:

48
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1992/075
Stock No:

WPIEA0751992
ISBN:

9781451849646
ISSN:

1018-5941

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