MACROECONOMIC IMPLICATIONS OF REAL EXCHANGE-RATE TARGETING IN DEVELOPING-COUNTRIES

The macroeconomic effects of a variety of exogenous and policy-induced real disturbances are examined under the assumption that the authorit ies target the level of the real exchange rate. We first discuss the i mplications-particularly for inflation and the current account-of targ eting the rate at an "overdepreciated" level, and then examine the dyn amic response of both output and inflation to a number of shocks. Furt her applications of the model to fiscal explanations of inflation, hig h-inflation plateaus, and money-based stabilization programs are also considered.