A "Market Clearing" Model of the International Business Cycle that Explains the 1980s.

The pioneering work of Meese and Rogoff (193) and, more recently, the work of Flood and Rose (1995) showed conclisively, that traditional Fundamentals of Exchange rate behavior offer little hope of explaining the international business cycle of the 1980s. In this paper we present a model which explains, rather well, the behavior of the real exchange rate and the real yield differential between the US and the major European economies, and also production, employment, and investment in the US relative to production, employmentm and investment in the same group of economies for the 1980s.