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

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Title: The inflationary consequences or real exchange rate targeting via accumulation of reserves
Author: Sosunov, Kirill ; Zamulin, Oleg
Organization: Bank of Finland
Department / Unit: Institute for Economies in Transition (BOFIT)
Series: BOFIT Discussion Papers
Series number: 11/2006
Year of publication: 2006
Publication date: 31.10.2006
Pages: 17 s.
Keywords: valuuttakurssit; valuuttavaranto; inflaatio; Venäjä; Kiina; Bofit-kokoelma;
JEL: E52
Abstract: 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
Rights: https://helda.helsinki.fi/bof/copyright


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