Premium
Reserve Requirements and Real Exchange Rate Misalignments in Emerging Market Economies
Author(s) -
Loeffler Axel
Publication year - 2015
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/rode.12164
Subject(s) - economics , exchange rate , monetary economics , emerging markets , fixed exchange rates , fiscal policy , capital (architecture) , capital flows , macroeconomics , microeconomics , history , archaeology , profit (economics)
A popular policy target in emerging markets is the real exchange rate as an undervalued real exchange rate is seen to enhance international competitiveness. Within an augmented Dornbusch model it is shown that the implicit tax of low remunerated reserve requirements represents an efficient tool to depreciate the real exchange rate. The model is empirically tested for a panel of L atin A merican, E ast A sian and E astern E uropean countries. Controlling for the impact of fiscal policies and direct capital controls, the reserve requirement tax significantly explains real exchange rate misalignments.