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Fundamental Determinants of Exchange Rates$
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Jerome L. Stein and Polly Reynolds Allen

Print publication date: 1998

Print ISBN-13: 9780198293064

Published to Oxford Scholarship Online: November 2003

DOI: 10.1093/0198293062.001.0001

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The Equilibrium Real Exchange Rate of Germany

The Equilibrium Real Exchange Rate of Germany

(p.182) 6 The Equilibrium Real Exchange Rate of Germany
Fundamental Determinants of Exchange Rates

Jerome L. Stein (Contributor Webpage)

Oxford University Press

The longer‐term systematic determinants of the real effective exchange rate of Germany are both domestic and external. The main domestic determinants are time preference, the ratio of public plus private consumption/GNP, and the Tobin q‐ratio. The main external determinants are the European terms of trade, whose variations are produced primarily by relative price of imported materials, and the GDP in the G7. The NATREX model explains how these fundamental determinants determine the evolution of the German equilibrium real effective exchange rate and the current account/GNP in the medium to longer run. The PPP theory is a special case of the NATREX when a linear combination of the fundamentals is stationary.

Keywords:   European terms of trade, German current account, German ratio of public plus private consumption/GNP, German time preference, German Tobin q‐ratio, Real Exchange Rate of Germany

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