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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.
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