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

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.real exchange rate targeting; foreign exchange reserves; Dutch disease

Can Oil Prices Explain the Real Appreciation of the Russian Ruble in 1998-2005?

The paper investigates whether the 80% real appreciation of the Russian ruble in 1998-2005 can be explained by the increase in oil revenues in a calibrated general equilibrium model. It is shown that the oil prices alone cannot account for the appreciation with forward-looking permanent-income consumers, unless the oil price increase is assumed permanent. Accounting for the increase in the volume of oil exports, however, can help, provided that the increase is assumed to be permanent.Real exchange rate; Commodity prices

The Inflationary Consequences of Real Exchange Rate Targeting via Accumulation of Reserves

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 the results to Russian and Chinese economies in recent years. Both countries appear to pursue reserve accumulation policies. We find a clear trade-o 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.Real exchange rate targeting, foreign exchange reserves, Dutch disease

Abstract State Machines 1988-1998: Commented ASM Bibliography

An annotated bibliography of papers which deal with or use Abstract State Machines (ASMs), as of January 1998.Comment: Also maintained as a BibTeX file at http://www.eecs.umich.edu/gasm

Oil Prices and Real Exchange Rate Movements in Oil-Exporting Countries: The Role of Institutions

Political and legal institutions affect the extent to which the real exchange rates of oil-exporting countries co-move with the oil price. In a simple theoretical model, strong institutions insulate real exchange rates from oil price volatility by generating a smooth pattern of fiscal spending over the price cycle. Empirical tests on a panel of 33 oil-exporting countries provide evidence that countries with high bureaucratic quality and strong and impartial legal systems have real exchange rates that co-move less with the oil price.Real Exchange Rate; Commodity Price; Institutions; Development

Monetary Policy in an Economy Sick with Dutch Disease

The paper studies monetary policy in an economy, in which the manufacturing sector is ousted completely by the presence of a large natural resource industry. Thus, the economy produces only non-tradable goods, which can complement or substitute imported goods, and the primary shock to the economy comes from the fluctuations in the world price of the exported commodity. A model of such an economy is calibrated using parameters relevant for Russia, which is an example of an economy sick with Dutch Disease, and several conventional policy rules are considered. It is shown that in absence of a well-functioning fiscal stabilization fund, it may be optimal for monetary authorities to respond to the real exchange rate, as the Bank of Russia allegedly does, using purchases of foreign reserves as the policy instrument. The logic of these actions is to replace the absent fiscal stabilization policy. In case monetary policy is conducted using an interest rate instrument, there should be no reaction to the real exchange rate and only slight one - to inflation.Dutch disease, Monetary Policy, Russia

Equilibrium Exchange Rates in Southeastern Europe, Russia, Ukraine and Turkey: Healthy or (Dutch) Diseased?

This paper investigates the equilibrium exchange rates of three Southeastern European countries (Bulgaria, Croatia and Romania), of two CIS economies (Russia and Ukraine) and of Turkey. A systematic approach in terms of different time horizons at which the equilibrium exchange rate is assessed is conducted, combined with a careful analysis of country-specific factors. For Russia, a first look is taken at the Dutch Disease phenomenon as a possible driving force behind equilibrium exchange rates. A unified framework including productivity and net foreign assets completed with a set control variables such as openness, public debt and public expenditures is used to compute total real misalignment bands.http://deepblue.lib.umich.edu/bitstream/2027.42/40156/3/wp770.pd