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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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(p.225) Appendix: International Finance Theory and Empirical Reality

(p.225) Appendix: International Finance Theory and Empirical Reality

Fundamental Determinants of Exchange Rates

Jerome L. Stein

Oxford University Press

The authors of the Representative Agent Intertemporal Optimization Models (RAIOM) argue that this model should supplant the Mundell–Dornbusch–Fleming model as the dominant paradigm in international finance to be used by central banks, finance ministries, and international economic agencies. First, the basic logic of this model as a possible explanation of the current account and real exchange rate is presented. Second, it is shown that the representative agent model as well as the Monetary and Purchasing Power Parity models lack explanatory power and are not consistent with the evidence. These failures induced us to develop the NATREX model, which is consistent with the evidence and has explanatory power.

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