Determinants of the Equilibrium Real Exchange Rate

J. Peter Neary

No 209, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

Keywords: Dutch Disease; Foreign Aid; Open Economy; Purchasing Power Parity; Real Exchange Rates (search for similar items in EconPapers)
Date: 1987-12
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Journal Article: Determinants of the Equilibrium Real Exchange Rate (1988)
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