Abstract: The NATREX approach offers an alternative paradigm to the Purchasing Power Parity for equilibrium real exchange rates. NATREX is the acronym for NATural Real EXchange, referring to a medium-run, inter-cyclical equilibrium real exchange rate, determined by real, fundamental factors. Importantly, the NATREX is a moving equilibrium real exchange rate, responding to continual changes in exogenous and endogenous real fundamentals. In a world of high capital mobility, the fundamentals of thrift, productivity, capital intensity, and net debt to foreigners become particularly important, influencing desired long-term capital flows and altering the equilibrium real exchange rate. The NATREX approach identifies and models the fundamental determinants of equilibrium real exchange rates, consistent with their recent empirical movements in various countries.The NATREX model is a dynamic stock-flow growth model. The goal of the NATREX approach is primarily empirical – to explain movements of medium- to long-run real exchange rates in terms of the fundamental real variables of thrift and productivity, assuming that real exchange rates do adjust toward their equilibrium level, although with a lag. A family of consistent general equilibrium models – of rational, optimizing behavior, determining medium-run equilibrium real exchange rates – forms the core of the NATREX approach. These models provide logical economic justifications for the empirical results.

Keywords: equilibrium real exchange rate, fundamental real variables, long-term capital flows, NATREX, natural real exchange rate, productivity, rational, return on investment, thrift, optimizing behavior