Exchange Rate Dynamics Under Alternative Intervention Rule

Fidelina B. Natividad-Carlos


This paper examines the effects of two alternative intervention rules, the real exchange rate rule and the nominal exchange rate rule, on the behavior of a small open economy. These rules are found to differ in terms of the resulting exchange-rate jumps, deviations from purchasing power parity, and relationships between interest rate and exchange rate movements. Thus, even though these rules have the same steady-state effects, in the short run it makes a difference as to which rule is pursued since they lead to different exchange-rate jumps and hence to different paths that the economy will follow.

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