This paper reexamines data on major industrial countries to investigate the dynamic interaction between money supply shocks and the real exchange rate. Specifically, this paper shows the relationship of observed comovements between money supply, industrial production index, interest rates, prices and real exchange rates to existing theories of real exchange rate determination. Using Vector Autoregression modeling technique alternative Granger causal orderings are fitted to the data in order to test validity of the different exchange rate models. The results of this study support the theory that the effect of money supply shocks is transitory and not permanent so there is no gain or loss in a country's competitiveness.
