Credibility and Exchange Rate Management in Developing Countries

Download or read book Credibility and Exchange Rate Management in Developing Countries written by Pierre-Richard Agénor and published by International Monetary Fund. This book was released on 1991-09-01 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: The paper examines the role of credibility in the conduct of exchange rate policy in developing countries, The analysis is based on a model in which policymakers are concerned about inflation and external competitiveness. Price setters in the nontraded goods sector of the economy adjust prices in reaction to anticipated fluctuations in the domestic price of tradable goods. This type of model is showm to generate a “devaluation bias” which undermines the credibility of a fixed exchange rate. The effect of reputational factors, signaling considerations, and joining a currency union as possible solutions to this bias is examined.