Abstract
Though the nominal exchange rate is typically a policy instrument in developing countries, the real exchange rate is an endogenous variable that responds to both exogenous and policy-induced shocks. This paper examines the dynamic effects on the real exchange rate of a variety of shocks, such as devaluation, changes in the terms of trade, fiscal policies, trade policies, and changes in foreign real interest rates. Since the path of the real exchange rate differs for different types of shocks, nominal exchange rate policies designed to achieve a target real exchange rate must take these differences into account.
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