Fundamental Determinants of Exchange Rates

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Fundamental Determinants of Exchange Rates

By: Jerome L. Stein, Polly Reynolds Allen

Our price: 16.99 + postage

Product code: 9605
ISBN: 0198293062
260 pages
Format: Pb
Published by: Oxford University Press, 1997, Rev. edition

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Fundamental Determinants of Exchange Rates - front page cover image

Description of Fundamental Determinants of Exchange Rates

Existing models fail to explain the large fluctuations in the real exchange rates of most currencies over the last twenty years. The Natural Real Exchange Rate approach (NATREX) taken here offers an alternative paradigm to those which focus on short-run movements of nominal exchange rates, purchasing power parity, or the representative intemporal optimization models. Yet it is also neo-classical in its stress upon the accepted fundamentals driving a real economy. It concentrates on the real exchange rates in terms of fundamental variables: the productivity of capital and social (public plus private) thrift at home and abroad.

The NATREX approach is a family of growth models, each tailored to the characteristics of the countries considered. The authors explain the real international value of the US dollar relative to the G10 countries, and the US current account. These are two large economies. The model is also applied to small economies, where it explains the real value of the Australian dollar and the Latin American currencies relative to the US dollar. The model is relevant to developing countries where the foreign debt is a concern. Finally, it is applied to two medium-sized economies to explain the bilateral exchange rate between the French Franc and the German Mark.

The authors demonstrate both the premise of the NATREX model and its applicability to economies large and small. Alongside the analysis, econometrics, and technical details of these case studies, the introductory chapter explains in accessible terms the rationale behind the approach. The mix of theory and empirical evidence makes this book relevant to academics and advanced graduate students, and to central banks, ministries of finance, and those concerned with the foreign debt of developing countries.

Fundamental Determinants of Exchange Rates - Chapter headings

1. The Economic and Policy Implications of the NATREX Approach

2. The Natural Real Exchange Rate of the United States Dollar, and Determinants of Capital Flows

3. The Dynamics of the Real Exchange Rate and Current Account in a Small Open Economy: Australia

4. The Natural Real Exchange Rate between the French Franc and the Deutschmark: Implications for Monetary Union

5. The Equilibrium Real Exchange Rate: Theory and Evidence for Latin America

6. The Equilibrium Real Exchange Rate of Germany

Appendix: International Finance Theory and Empirical Reality

Index

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