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 eschange rates, purchasing power parity of the representative agent intertemporal optimization models. Yet it is also neo-classical in its stress upon the accepted fundamentals driving a real economy. It concentrates on the real exchange rate, and explains medium- tolong-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 relativ to the G10 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. Finally, it is applied to two medium-sized economies to explain the bilateral exchange rate between the French franc and the Deutsche Mark. The authors demonstrate both the promise of the NATREX model and its applicability to economies large and small. Alongside the analysis, econometrics, and technical details of these case studies, the introductory chapter explains in accessible terms the rationale behind the approach. The mix of theory and empirical evidence makes this book relevant to academics and advanced graduate students, and to central banks, ministries of finance, and those concerned with the foreign debt of developing countries.
Review quote:
This book greatly enhances our understanding of the behaviour of real exchange rates. (Peter Clark of the JMF)
Stein and associates have reopened a promising field of research. (J. Niehaus)
This monograph presents an original contribution to a topic of continuing interest. 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 model (NATREX) taken in this book explains the medium- to longer-term evolution of the real exchange rate and current account in terms of economic fundamentals: productivity of capital and social thrift at home and abroad. The approach grew out of agreement that existing models have been disappointing. NATREX comprises a family of growth models which can be tailored to differently sized economies. In this book, the authors apply it to the USA, the G10 countries, Australia, Latin America, France and Germany.
Review quote:
This book greatly enhances our understanding of the behaviour of real exchange rates. (Peter Clark of the JMF)
Stein and associates have reopened a promising field of research. (J. Niehaus)
This monograph presents an original contribution to a topic of continuing interest. 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 model (NATREX) taken in this book explains the medium- to longer-term evolution of the real exchange rate and current account in terms of economic fundamentals: productivity of capital and social thrift at home and abroad. The approach grew out of agreement that existing models have been disappointing. NATREX comprises a family of growth models which can be tailored to differently sized economies. In this book, the authors apply it to the USA, the G10 countries, Australia, Latin America, France and Germany.