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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.

Suggested Citation

  • Sebastian Edwards, 1988. "Real and Monetary Determinants of Real Exchange Rate Behavior: Theory and Evidence From Developing Countries," NBER Working Papers 2721, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2721
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    1. 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.
    2. 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.
    3. 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 382-390, September.
    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. 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.
    6. Aizenman, Joshua, 1985. "Adjustment to monetary policy and devaluation under two-tier and fixed exchange rate regimes," Journal of Development Economics, Elsevier, vol. 18(1), pages 153-169.
    7. Obstfeld, Maurice, 1984. "Balance-of-Payments Crises and Devaluation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(2), pages 208-217, May.
    8. 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.
    9. Rudiger Dornbusch, 1982. "Equilibrium and Disequilibrium Exchange Rates," NBER Working Papers 0983, National Bureau of Economic Research, Inc.
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