PPP EXCHANGE RATE RULES,MACROECONOMIC (IN)STABILITY,AND LEARNING* |
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| Authors: | Luis‐Felipe Zanna |
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| Affiliation: | 1. International Monetary Fund, Washington, D.C., USA;2. I thank David Bowman, Sanjay Chugh, George Evans, Jon Faust, Dale Henderson, Kevin Huang, Stephanie Schmitt‐Grohé, Frank Schorfheide, Martín Uribe, participants at SCIEA 2004 and the fall 2004 Midwest International Economics and Economic Theory Meetings, and three anonymous referees for comments and suggestions. Please address correspondence to: Luis‐Felipe Zanna, International Monetary Fund, 700 19th Street, NW, Washington, DC 20431, U.S.A. Phone: 202‐623‐8261. Fax: 202‐589‐8261. E‐mail: . |
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| Abstract: | In order to maintain competitiveness, governments in developing economies seem to have pursued purchasing power parity (PPP) exchange rate rules, by adjusting the nominal devaluation rate in response to real exchange rate deviations from an intermediate target. This article shows that these rules are likely to induce macroeconomic instability, as they generate sunspot‐driven fluctuations that are in fact learnable by agents in the Expectational‐Stability sense. It finds that the existence of these “learnable sunspots” depends, among others, on open economy features, including the degree of openness and the degree of exchange rate pass‐through to consumer's import prices. |
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