PPP EXCHANGE RATE RULES, MACROECONOMIC (IN)STABILITY, AND LEARNING*

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.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 10 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.