The Central Banks around the world are commonly responsible for their exchange rate policies. During the 1990s it has been clear that the controllability of the exchange rates by the central banks' interventions is limited (McKinnon, 1993). When the underlying monetary reserves are bounded,...

The paper investigates the ability of monetary authorities to keep the real exchange rate undervalued over the long run by implementing a policy of accumulating foreign exchange reserves. We consider a model of a three-sector, small, open economy, where the central bank continuously purchases...