Determinants of the real exchange rate in the long-run for developing and emerging countries - a theoretical and empirical approach

Aug 31, 2026

This paper presents a new framework for identifying determinants of the long-run real exchange rate in developing and emerging countries. The study integrates Kaltenbrunner’s model, grounded in General Theory chapter 17, with the productivity differential effect. It argues that short-run factors and monetary variables can influence long-run exchange-rate outcomes. It further emphasizes that the hierarchical structure of the international monetary system is essential for explaining exchange-rate movements, which is empirically tested using panel econometric techniques.

LanguageEnglish

CategoryGeneral

FormatDOCX

Pages21

Reading Time7 min

AccessFree to download

Introduction

Research objective and alternative approach

Conventional versus post-Keynesian perspectives

Proposed theoretical framework

Empirical contribution and testing strategy

Determinants of the real exchange rate in the long-run for developing and emerging countries: a theoretical and empirical approach Lúcio Otávio Seixas Barbosa Frederico G. Jayme Junior Fabrício J. Missio Abstract: This paper present a new framework for the determinants of real exchange in the long-run in developing and emerging countries (DECs). We connect the model developed by Kaltenbrunner (2015), which is grounded on chapter 17 of the General Theory, with productivity's differential effect. By doing so, our frame states that even short-run factors and monetary variables affect the long-run real exchange rate. Moreover, it points out that the hierarchical nature of the international monetary system is crucial to understand exchange rate movements in DECs. Besides presenting such theoretical approach, our contribution is to test it empirically for 45 DECs from 1990 to 2008 by applying econometric techniques appropriate for panel data. We use a different dataset, which comprises, among other variables, foreign portfolio flow, interest rate differential, external vulnerability indicators and international liquidity, on annual basis. The empirical results endorses this framework. Overall, it shows the primacy of financial factors as determinants of the long-run real exchange rate, particularly new forms of external vulnerability linked to the rising share of foreign investor in domestic-currency financial assets, and points to the endogenous and self-perpetuating nature of international monetary system hierarchy. Key-words: real exchange rate determination, developing and emerging countries, currency hierarchy. Resumo: Este estudo apresenta uma nova abordagem dos determinantes da taxa real de câmbio no longo prazo para economias emergentes e em desenvolvimento (DECs). Conecta-se ao modelo desenvolvido por Kaltenbrunner (2015), o qual é fundamentado no capítulo 17 da Teoria Geral, o efeito do diferencial de produtividade. Dessa forma, sugere-se que mesmo variáveis monetárias e de curto prazo afetam a taxa real de câmbio de longo prazo. Além disso, aponta-se a importância da hierarquia do sistema monetário internacional sobre a taxa de câmbio dos DECs. Além de apresentar essa abordagem teórica, nossa contribuição é testá-la empiricamente para 45 DECs, de 1990 a 2008, por meio de técnicas para dados em painel. Utiliza-se um conjunto de dados diferentes, que compreende, entre outras variáveis, fluxos de portfólio, diferencial de juros, medidas de vulnerabilidade externa e a liquidez internacional, em base anuais. Em linhas gerais, os resultados mostram a primazia dos fatores financeiros na determinação da taxa real de câmbio no longo prazo, particularmente as novas formas de vulnerabilidade associadas à participação do investidor externos em ativos financeiros denominados em moeda doméstica, e indica a natureza endógena e de autoperpetuação da hierarquia do sistema monetário. Palavras-chave: , determinação da taxa real de câmbio, países emergentes e em desenvolvimento, hierarquia de moedas Jel Code: E4, B5, F31. Área ANPEC: Macroeconomia, Economia Monetária e Finanças Determinants of the real exchange rate in the long-run for developing and emerging countries: a theoretical and empirical approach 1 Introduction This paper aims to present an alternative approach regarding long-run real exchange rate determinants for emerging and developing countries (DECs). To do so, we reassess conventional and non-conventional theories related to such issue. Thereby, we propose a model, following the post-Keynesian approach, which states that even short run and monetary variables affects the long-run real exchange rate. Firstly, we differ conventional theory from unconventional. On one hand, we present three different conventional approaches connected to long-run real exchange rate: Purchasing Power Parity (PPP), Balassa-Samuelson (BS) effect and the model developed by Bergstrand (1991). On the other hand, we show post-Keynesian approach, which

FAQs

What is the paper’s main focus regarding the real exchange rate?

The paper focuses on determinants of the real exchange rate in the long run for developing and emerging countries, proposing a framework that links theory to empirical testing.

How does the proposed approach differ from conventional theories?

It distinguishes conventional views from a post-Keynesian approach by arguing that portfolio flows and monetary variables can affect the long-run real exchange rate.

What empirical strategy and data are used to test the framework?

The framework is tested for 45 developing and emerging countries from 1990 to 2008 using panel-data econometric techniques with an annual dataset including foreign portfolio flows, interest rate differentials, external vulnerability indicators, and international liquidity.

Aug 31, 2026

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