The inflationary consequences or real exchange rate targeting via accumulation of reserves
Sosunov, Kirill; Zamulin, Oleg (31.10.2006)
Numero
11/2006Julkaisija
Bank of Finland
2006
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:bof-201408072080Tiivistelmä
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. Keywords: Real exchange rate targeting, foreign exchange reserves, Dutch disease. JEL classification: E52, F4