Download or read book Real Exchange Rate Targeting and Macroeconomic Instability written by Martín Uribe and published by . This book was released on 2002 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using an optimizing model of a small open economy, this paper studies the macroeconomic effects of PPP rules whereby the government increases the devaluation rate when the real exchange rate defined as the price of tradables in terms of nontradables is below its long-run level and reduces the devaluation rate when the real exchange rate is above its long-run level. The paper shows that the mere existence of such a rule can generate aggregate fluctuations due to self-fulfilling revisions in expectations. The result is shown to obtain in both flexible- and sticky-price environments.