An eclectic approach to real exchange rate determination

We present a model of bilateral real exchange rate determination based on different theories that can be combined into a common statistical framework. Although eclectic, the approach is successfully used to shape a final specification which performs surprisingly well when out of sample exercises are carried out. Among the desirable features of the model there is the achievement of a high level of cross-currency consistency and the full interpretation of the coefficients from an economic point of view. Joint estimation by SURE, through the extraction of relevant interrelations among currencies, turns out to be an optimal tool to compute their historical fair values.