Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212583 
Year of Publication: 
2006
Series/Report no.: 
BOFIT Discussion Papers No. 11/2006
Publisher: 
Bank of Finland, Institute for Economies in Transition (BOFIT), Helsinki
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.
Subjects: 
Real exchange rate targeting
foreign exchange reserves
Dutch disease
JEL: 
E52
F4
Persistent Identifier of the first edition: 
ISBN: 
952-462-830-9
Document Type: 
Working Paper

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