Working Paper: NBER ID: w2775
Authors: Rudiger Dornbusch
Abstract: 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.
Keywords: exchange rates; macroeconomics; monetary approach; equilibrium approach; new classical approach
JEL Codes: F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| productivity improvements in the home goods sector (L68) | real exchange rate appreciation (F31) |
| fiscal policy changes (E62) | nominal and real exchange rates (F31) |
| interest differentials (E43) | exchange rate depreciation (F31) |
| real shocks (F31) | nominal and real exchange rates (F31) |
| macroeconomic model (E10) | large real appreciation of the dollar (F31) |