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Real Exchange Rates and Macroeconomics: A Selective Survey

  • Rudiger Dornbusch

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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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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  1. Baxter, M. & Stockman, A.C., 1988. "Business Cycles And The Exchange Rate System: Some International Evidence," RCER Working Papers 140, University of Rochester - Center for Economic Research (RCER).
  2. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
  3. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Scholarly Articles 3445091, Harvard University Department of Economics.
  4. Barry Eichengreen., 1987. "Real Exchange Rate Behavior under Alternative International Monetary Regimes: Interwar Evidence," Economics Working Papers 8755, University of California at Berkeley.
  5. Allan Drazen & Elhanan Helpman, 1987. "Stabilization with Exchange Rate Management under Uncertainty," NBER Working Papers 2268, National Bureau of Economic Research, Inc.
  6. Dornbusch, Rudiger & Frankel, Jeffrey, 1988. "The Flexible Exchange Rate System: Experience and Alternatives," Department of Economics, Working Paper Series qt5ct1w459, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  7. Allan Drazen & Elhanan Helpman, 1987. "Stabilization with Exchange Rate Management," The Quarterly Journal of Economics, Oxford University Press, vol. 102(4), pages 835-855.
  8. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
  9. Jeffrey A. Frankel, 1985. "The Implications of Mean-Variance Optimization for Four Questions in International Macroeconomics," NBER Working Papers 1617, National Bureau of Economic Research, Inc.
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