publication . Article . 1987

Real Exchange Rate Dynamics in a Small, Primary-Exporting Country

Mohsin S. Khan; Peter J. Montiel;
Open Access
  • Published: 01 Jan 1987 Journal: Staff Papers - International Monetary Fund, volume 34, issue 4 December, pages 681-710
Abstract
Although the nominal exchange rate is often used as a policy instrument in small, primary-commodity-exporting countries, the real exchange rate is an endogenous variable that responds to both exogenous and policyinduced shocks. This paper examines the dynamic effects on the real exchange rate of various shocks, such as devaluation, fiscal and trade policies, and changes in the terms of trade and foreign real interest rates. Because the path of the real exchange rate differs for different types of shocks, nominal exchange rate policies to achieve a target real exchange rate must take these differences into account.
Subjects
free text keywords: Covered interest arbitrage, Interest rate parity, Fisher hypothesis, Devaluation, Real interest rate, Exchange rate, International Fisher effect, Monetary economics, Real income, Economics
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