This paper examines the long-run determinants of the real exchange rate from a stock-flow perspective. The empirical analysis estimates a long-run relationship between the real exchange rate, net foreign assets and other factors affecting trade flows. Using postwar data for the United States and Japan, cointegration analysis supports the finding that the structural factors underlying each country’s net trade and net foreign asset positions determine the long-run path for the real value of the dollar and the yen. The empirical analysis also provides estimates for the underlying stochastic trend in each real exchange rate series.

Textbook, research papers on international economic theory, economic policy and practice - includes a literature survey of theoretical studies in trade relations; covers evolution of economic models explaining the determinants of trade structure, capital flow, labour mobility, trade in natural resources, etc.; examines macroeconomics aspects of balance of payments, exchange rate, international monetary system, economic relations and dependence, etc. Bibliography, graphs, statistical tables.

The exchange rate is a crucial variable linking a nation's domestic economy to the international market. Thus choice of an exchange rate regime is a central component in the economic policy of developing countries and a key factor affecting economic growth. Historically, most developing nations have employed strict exchange rate controls and heavy protection of domestic industry-policies now thought to be at odds with sustainable and desirable rates of economic growth. By contrast, many East Asian nations maintained exchange rate regimes designed to achieve an attractive climate for exports and an "outer-oriented" development strategy. The result has been rapid and consistent economic growth over the past few decades. Changes in Exchange Rates in Rapidly Developing Countries explores the impact of such diverse exchange control regimes in both historical and regional contexts, focusing particular attention on East Asia. This comprehensive, carefully researched volume will surely become a standard reference for scholars and policymakers.

The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.

This article analyzes the theory of equilibrium real exchange rates and defines misalignment as a deviation of the real exchange rate (RER) from its equilibrium level. The role of macroeconomic policies is then analyzed under three alternative nominal exchange rate regimes: predetermined nominal exchange rates; floating nominal rates; and dual or black market nominal exchange rates. This discussion points out how inconsistent macroeconomic policies often lead to real exchange rate misalignment. Corrective measures, including nominal devaluation and several alternative approaches, are then evaluated.

"This book greatly enhances our understanding of the behavior of real exchange rates. It provides an elegant model based on a solid theoretical foundation that links real exchange rates to their fundamental economic determinants and takes proper account of stock and flow considerations. The authors provide a masterful account of how changes in productivity and thrift affect the real exchange rate, and show that the long-run impact depends crucially on whether the change reflects the former fundamental (investment) or the latter (consumption). The empirical implementation uses state-of-the-art cointegration and error correction methodologies that are eminently well suited to capture the short-run adjustment of the real exchange rate to its medium- to long-run equilibrium value. The empirical results are extremely encouraging, as the economic fundamentals identified by the authors can explain a substantial part of the movement in the real exchange rate of a number of countries."--Peter Clark, International Monetary Fund