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Real Exchange Rate and Output Growth in Inflation-Targeting Small Open Economies

Real Exchange Rate and Output Growth in Inflation-Targeting Small Open Economies. Ignacio Perrotini Hernández Santiago Capraro Rodríguez. http://tmypfunam.wordpress.com/. Outline. Introduction Inflation targeting A Cumulative Causation Model Econometric Results Conclusions.

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Real Exchange Rate and Output Growth in Inflation-Targeting Small Open Economies

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  1. Real Exchange Rate and Output Growth in Inflation-Targeting Small Open Economies Ignacio Perrotini Hernández Santiago Capraro Rodríguez http://tmypfunam.wordpress.com/

  2. Outline • Introduction • Inflationtargeting • A CumulativeCausationModel • EconometricResults • Conclusions

  3. I. Introduction Crises of ortodoxmonetarypolicies: Monetaristexperiment (1970s-1980s) (Kaldor, 1970, 1979, 1986; Desai, 1981; Moore, 1986). RationalExpectationsexperiment (1980s-1990s) Collapse of fixedexchangerateregimes (1980s, 1990s, 2000s).

  4. Mainmessage of thepaper: Accordingtoourempiricalfindings, theredoesn’tseemtobe a positive relationshipb’nthe real exchangerate (q) and GDP duringtheperiodunderscrutiny (1960-2010) in Brazil, South Korea and Mexico. Heterogenouseffects of q onConsumption, Investment and exports in eachdifferent country. Ergo, notpossibletorecommend a general policyforallcountrieswithouttakingintoaccountthespecificstructure of theeconomyunderconsiderationbeforewe can predicttheeffect of real exchangeratefluctuations.

  5. III. Inflationtargeting

  6. 1987-1992: gradual drop of M aggregates. • “wedidnotabbandonmonetaryaggregates; instead, theydidabbandonus” (a curious central banker). • Henceinflationtargeting (Taylor, 2001; Woodford, 2003; Svensson, 2007). • Oldwine in new goatskins (Wicksell, 1898).

  7. The new monetaryconsensus (IT monetarypolicyframeworks): Itissaidtodiminishinflation and guaranteelong-runpricestabilitythroughinterestratereactionfunctionswith no intermediate targets whatsoever. Yet, the role of real exchangerates in IT monetarypolicystrategies: Fear of floating Exchange marketsterilisedinterventions

  8. The role of theexchangerate as a nominal anchorforinflationtendstoappreciatethecurrency. Tobesure, theexchange has playedanoutstanding role in IT models. However, it has beensaid, thismayentailnegativeeffectsongrowth and employment (cf. Frenkel, Ros, Bresser-Pereira, Rapetti, López, Sánchez and Spanos).

  9. III. A Cumulativecausationmodel

  10. A Cumulativecausationmodel: con (1) con (2) con (4) con (6) (7)

  11. A Cumulativecausationmodel: (8) con con (11) .

  12. A Cumulativecausationmodel: (13) . .(15) . .(16) .

  13. .(15) • Condition (15) impliesthat a currencydevaluationwillbear a positive impactongrowthif and onlyifthe positive impactonexportsisgreaterthanthenegativeimpactonaggregatedemandduetothereduction in real wages.

  14. .(16) . Condition (16) meansthatanincrement (diminution) in nominal wageswillincrease(diminish) effectivedemandif and onlyifthenegative (positive) effectonexportsiscompensatedbythe positive (negative) effect of anincreasingwageonaggregatedemand.

  15. IV. EconometricResults Mexico:

  16. .

  17. Brazil:

  18. (20) (21) (22) (23).

  19. V. Conclusions and final remarks • Expansionaryeffectsorcontractionaryeffects of devaluations?

  20. V. Conclusions and final remarks No positive relationshipb’n real exchangerate and output in Brazil and Mexico. Therefore, thecontractionaryeffects of IT should be foundelsewhere. Fiscal policy, forinstance (thereis a positive relationshipb’n fiscal policy and growth). Swan (1955).

  21. Muchas gracias!

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