This paper develops and estimates a model of the joint determination of the exchange rate, international reserves, and the rate of inflation under a crawling-peg system. The framework presented, which is an extension of previous work on the monetary approach, generates short-run deviations from purchasing power parity that occur simultaneously with movements in both international reserves and the exchange rate. The model is estimated by full-information maximum likelihood on the basis of quarterly data for Brazil.

This paper develops and estimates a model of the joint determination of the exchange rate, international reserves, and the rate of inflation under a crawling-peg system. The framework presented, which is an extension of previous work on the monetary approach, generates short-run deviations from purchasing power parity that occur simultaneously with movements in both international reserves and the exchange rate. The model is estimated by full-information maximum likelihood on the basis of quarterly data for Brazil.