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Real Exchange Rate, Monetary Policy and Employment: Economic Development in a Garden of Forking Paths

By Roberto Frenkel, Lance Taylor | Center for Economic Policy Analysis, New School University, Centro de Estudios de Estado y Sociedad (CEDES) | January 1, 2006

An appropriate level of the real exchange rate (RER) can be a key support for growth,
employment creation, and overall development of the “real economy,” but programming the RER
is macroeconomically complicated. The coordination issues it raises must be addressed with due
attention given to controlling inflation, reducing financial fragility and risk, and aiming toward full
employment of available resources. Thus, managing the exchange rate necessarily encompasses
monetary and expectational considerations. A key challenge is to provide enough degrees of
freedom for the monetary authorities to carry through these tasks.

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