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

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  • Sebastian Edwards

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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2721.

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Date of creation: Sep 1988
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Publication status: published as "Real and Monetary Determinants of Real Exchange Rate Behavior." From Journal of Development Economics, Vol. 29, pp. 311-341, (1988).
Handle: RePEc:nbr:nberwo:2721

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  1. 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.
  2. Joshua Aizenman, 1983. "Adjustment to Monetary Policy and Devaluation Under Two-Tier and Fixed Exchange Rate Regimes," NBER Working Papers 1107, National Bureau of Economic Research, Inc.
  3. R. Dornbusch, 1982. "Equilibrium and Disequilibrium Exchange Rates," Working papers 309, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Arnold Harberger, 1986. "Economic Adjustment and the Real Exchange Rate," NBER Chapters, in: Economic Adjustment and Exchange Rates in Developing Countries, pages 369-424 National Bureau of Economic Research, Inc.
  5. Maurice Obstfeld, 1983. "Balance-of-Payments Crises and Devaluation," NBER Working Papers 1103, National Bureau of Economic Research, Inc.
  6. 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.
  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.
  8. van Wijnbergen, Sweder, 1985. "Taxation of International Capital Flows, the Intertemporal Terms of Trade and the Real Price of Oil," Oxford Economic Papers, Oxford University Press, vol. 37(3), pages 382-90, September.
  9. 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.
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