Summary
This paper shows that managed float exchange rate systems may be beset by problems of dynamic instability, given a combination of high capital mobility and minimally rational expectations. This is especially the case if the authorities index the rate of real appreciation/depreciation to either the overall rate of reserve accumulation or the level of reserves. A possible route out of this dilemma is to index the rate of real appreciation to the level of the nominal trade surplus.
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References
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I have benefited from discussions with Jay Levin and from the helpful comments of an anonymous referee. All remaining errors are my sole responsibility.
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Bhandari, J.S. Speculation and the crawling peg: Some further issues. De Economist 133, 78–86 (1985). https://doi.org/10.1007/BF01675963
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DOI: https://doi.org/10.1007/BF01675963