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Determinants of the equilibrium real exchange rate

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  • J. Peter Neary

Abstract

This note presents a compact derivation of the determinants of changes in the equilibrium real exchange rate (the inverse of the price index of nontraded goods relative to traded goods), in a small open economy with any number of goods and factors. It is shown that the change in the real exchange rate equals a simple weighted sum of the differences between marginal propensities to consume and to produce individual nontraded goods. Implications of the result are noted for a variety of applied questions, including the effects of foreign aid, the "Dutch disease" and purchasing power parity comparisions between countries.

Suggested Citation

  • J. Peter Neary, 1987. "Determinants of the equilibrium real exchange rate," Working Papers 198748, School of Economics, University College Dublin.
  • Handle: RePEc:ucn:wpaper:198748
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    File URL: http://hdl.handle.net/10197/1434
    File Function: First version, 1987
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