Abstract
The consequences of exchange rate and monetary policies are investigated under two foreign exchange regimes. The analysis is motivated by the experiences in sub-Saharan Africa. The supply side of the open economy model developed by Buffle (1986) is modified to take into account the import dependency of the region. In the first regime, with endogenous foreign savings, overvalued exchange rate and expansionary monetary policy tend to increase the current account deficit. In the second regime, when intermediate imports are rationed to handle the foreign exchange shortage, overvaluation and monetary expansion are shown to be likely sources of output contraction. The cost of policy reorientation is reduced investment.
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Rattsø, J. Devaluation and monetary policy with import compression. Open economies review 5, 159–175 (1994). https://doi.org/10.1007/BF01000485
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DOI: https://doi.org/10.1007/BF01000485