The Fundamental Determinants of the Real Exchange Rate of the U.S. Dollar Relative to Other G-7 Currencies
Jerome L. Stein
Brown University - Division of Applied Mathematics; CESifo (Center for Economic Studies and Ifo Institute)
IMF Working Paper No. 95/81
This paper provides a consistent theoretical framework to explain the fundamental determinants of the evolution in the medium to longer run of the real effective exchange rate of the United States relative to the currencies of the other G-7 countries. The fundamental determinants are productivity and thrift in the United States and the other major industrial countries. The real rate generated by these fundamentals is referred to as the natural real exchange rate (NATREX). Then, using cointegrating and error correction analysis, the paper examines the explanatory power of the NATREX model to explain the evolution of the real exchange rate of the U.S. dollar during the floating exchange rate period.
Number of Pages in PDF File: 46
JEL Classification: F20, F21, F31, F32, F14, F34
Date posted: February 15, 2006