A Two-Country Natrex Model for the Euro/Dollar: Theoretical Approach
CIDEI Working Paper No. 76
30 Pages Posted: 8 Feb 2012
Date Written: April 1, 2007
This paper develops a NATREX (NATural Real EXchange rate) model for two large economies, the Eurozone and the United States. The NATREX approach has already been adopted to explain the medium-long term dynamics of the real exchange rate in a number of industrial countries. So far, however, it has been applied to a one-country framework where the rest of the world is treated as given. In this paper, we build a NATREX model where the two economies are fully specified and allowed to interact. Our theoretical model offers the basis to empirical estimation of the euro/dollar equilibrium exchange rate that will be carried out in future research.
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