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

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  • Sebastion Edwards

    (UCLA & National Bureau of Economic Research)

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.

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Bibliographic Info

Paper provided by UCLA Department of Economics in its series UCLA Economics Working Papers with number 506.

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Date of creation: 01 Sep 1988
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Handle: RePEc:cla:uclawp:506

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Web page: http://www.econ.ucla.edu/

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  1. Joshua Aizenman, 1985. "Adjustment to Monetary Policy and Devaluation Under Two-Tier and Fixed Exchange Rate Regimes," NBER Working Papers 1107, National Bureau of Economic Research, Inc.
  2. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
  3. Maurice Obstfeld, 1984. "Balance-of-Payments Crises and Devaluation," NBER Working Papers 1103, National Bureau of Economic Research, Inc.
  4. Kemal Dervis & Peter A. Petri, 1987. "The Macroeconomics of Successful Development: What Are The Lessons?," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 211-262 National Bureau of Economic Research, Inc.
  5. R. Dornbusch, 1982. "Equilibrium and Disequilibrium Exchange Rates," Working papers 309, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Lizondo, JoseSaul, 1987. "Exchange rate differential and balance of payments under dual exchange markets," Journal of Development Economics, Elsevier, vol. 26(1), pages 37-53, June.
  7. Khan, Mohsin S, 1986. "Developing Country Exchange Rate Policy Responses to Exogenous Shocks," American Economic Review, American Economic Association, vol. 76(2), pages 84-87, May.
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