The Fundamental Determinants of Exchange Rates

Existing models fail to explain the large fluctuations in the real exchange rates of most currencies over the past twenty years. The Natural Real Exchange Rate approach (NATREX) taken here offers an alternative paradigm to those which focus on short-run movements of nominal exchange rates, yet it is also new-classical in its stress upon the accepted fundamentals driving a real economy. It concentrates on the real exchange rate, and explains medium-to long-run movements in equilibrium real exchange rates in terms of fundamental variables: the productivity of capital and social (public plus private) thrift at home and abroad. The NATREX approach is a family of growth models, each tailored to the characteristics of the countries considered. The authors explain the real international value of the US dollar relative to the G-10 countries, and the US current account. These are two large economies. The model is also applied to small economies, where it explains the real value of the Australian dollar and the Latin American currencies relative to the US dollar. The model is relevant for developing countries where the foreign debt is a concern.
This book is intended for academics and advanced graduate students. Professionals concerned with exchange rates and foreign debt, including bankers, financiers, international economists and commentators, and politicians.