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Real Exchange Rates and Macroeconomics: A Selective Survey

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  • Rudiger Dornbusch

Abstract

This paper discusses exchange rate issues in advanced and in developing countries. For the determination of exchange rates among industrialized countries the key question is the following: What is the right framework -- the monetary approach, the equilibrium approach, the new classical approach or the macroeconomic model in the tradition of Mundell-Fleming. To shed light on that question two empirical problems are considered: What is known about the behavior of real exchange rates and how well do alternative models explain the relation among interest rates, expected depreciation and actual depreciation. The second half of the paper discusses real exchange rates in developing countries. This strand of literature has become important in the context of adjustment programs. We focus on the relation between real exchange rates and the profitability of capital. The model highlights the sharp discrepancy between the mobility of capital (even physical capital, in the long run) and the immobility of labor.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2775.

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Date of creation: Nov 1988
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Publication status: published as Dornbusch, Rudiger. "Real Exchange Rates and Macroeconomics: A Selective Survey." The Scandinavian Journal of Economics, Vol. 91, No. 2, pp. 401-432, (June 1989).
Handle: RePEc:nbr:nberwo:2775

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