Fluctuations in the Dollar: A Model of Nominal and Real Exchange Rate Determination

Abstract

This paper develops and tests empirically a model to explain movements in the dollar's foreign exchange value during the flexible exchange rate period since early 1973. The model is designed movements in both the nominal and real exchange rates, where the real exchange rate is defined as the nominal rate devided by relative prices. The empirical application is to the foreign exchange value of the dollar against the basket of currencies of ten major industrial countries.