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Journal of Economic Integration 2000 September;15(3) :436-459.
The Advantages of Targeting the Real Exchange Rate

Christos. C. Paraskevopoulos John Paschakis 

American University of Beirut and the Athenian Policy Forum
Copyright ©2000 Journal of Economic Integration
This paper uses a simple open-economy macroeconomic framework to explore the implications of real exchange rate targeting for the behavior of real output, the domestic real interest rate, trade account, net foreign asset holdings, and the inflation rate. It finds that a more depreciated level of the real exchange rate decreases the domestic real interest rate and net foreign debt, and leads to a higher level of output and net exports. For inflation control, given price stick iness real exchange rate targeting may not lead to higher rates of inflation. The results are consistent with the after-effects of EMS currency re-alignment. They also imply that a "real targets approach" to exchange rate policy rather than a "nominal anchor approach" may be more appropriate for the European Union inflation-prone countries and the high inflation developing countries.
Keywords: Real Exchange Rate Ta rgeting | Foreign Exchange Market | Current account
1. Branson, William H. (1985), Causes of Appreciation and Volatility of the Dollar, Reprint 785, NBER (National Bureau of Economic Research), in The US $--Recent Developments Outlook and Policy Options, Federal Reserve Bank of Kansas City.
2. Edwards, Sebastian (1996), Exchange-Rate Anchors, Credibility, and Inertia: A Tale of Two Crises, Chile and Mexico,American Economic Review Papers and Proceedings 86; 176--180.
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