Real and Monetary Determinants of Real Exchange Rate Behavior: Theory and Evidence from Developing Countries

51 Pages Posted: 28 Jun 2004 Last revised: 10 Dec 2022

See all articles by Sebastian Edwards

Sebastian Edwards

University of California, Los Angeles (UCLA) - Global Economics and Management (GEM) Area; National Bureau of Economic Research (NBER)

Date Written: September 1988

Abstract

This paper develops a dynamic model of real exchange rate behavior in developing countries. A three goods economy (exportables, importables and nontradables) is considered. Residents of this country hold domestic and foreign assets, and there is a dual exchange rate regime. There is a government that consumes importables and nontradables. A distinction is made between equilibrium and disequilibrium movements of the RER. The determinants of real exchange rate misalignment are studied with emphasis placed on the role of devaluations and balance of payments crisis. The implications of the model are tested using data for 12 developing countries. The results obtained are generally favorable for the model. The issue of RER stationarity is also analyzed.

Suggested Citation

Edwards, Sebastian, Real and Monetary Determinants of Real Exchange Rate Behavior: Theory and Evidence from Developing Countries (September 1988). NBER Working Paper No. w2721, Available at SSRN: https://ssrn.com/abstract=226864

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