Determinants of the Equilibrium Real Exchange Rate.

Working paper

This paper presents a compact derivation of the determinants of changes in the equilibrium real exchange rate (the price index of non-traded goods relative to traded goods) in a small open economy with any number of goods and factors. It is shown that the change in the real exchange rate equals a simple weighted sum of the differences between the marginal propensities to consume and the marginal propensity to produce individual non-traded goods. Implications of the result are noted for a variety of applied questions, including the effects of foreign aid, the "Dutch Disease", and cross-country comparisons of purchasing power parity.

Authors: Neary, J

• Publisher: CEPR
• Host title: C.E.P.R.Discussion Papers
• Volume: 209
• Series: C.E.P.R.Discussion Papers
• Publication date: 1987-01-01
• Paper number: 209
• Language: English