The determination of the exchange rate: A new-developmental approach

Luiz Carlos Bresser-Pereira, Carmem Feijó and Eliane Araujo

Structural Change and Economic Dynamics, 2025, vol. 72, issue C, 245-255

Abstract: This paper discusses the long-term determination of the exchange rate, given that it may remain depreciated or overvalued for some time. It defines the equilibrium exchange rate and the competitive exchange rate; the latter makes investment projects competitive internationally. Instead of starting from the PPP theory, it starts from the concept of the value of foreign money or the exchange rate around which the price, the exchange rate, revolves according to the supply and demand of foreign money. This, in turn, is influenced by three factors: the terms of trade, the current-account balance as a determinant of the net capital flows or inflows, and the interest rate differential. This paper criticizes the “fundamental equilibrium” concept and develops two econometric tests. The first checks whether the four determinant variables used in the model are relevant. The second verifies whether this model is a good predictor of the exchange rate throughout time.

Keywords: Terms of trade; Exchange rate; Capital flows; Current account; Interest rate (search for similar items in EconPapers)
JEL-codes: F31 O24 (search for similar items in EconPapers)
Date: 2025
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Working Paper: The determination of the exchange rate: a new-developmental approach (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:streco:v:72:y:2025:i:c:p:245-255

DOI: 10.1016/j.strueco.2024.08.015

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