What Determines the Nominal Exchange Rate? Some Cross Sectional Evidence

In this paper, the determination of long-run movements in nominal exchange rates across countries are examined. The author models the long-run movement in the nominal exchange rate as depending on (1) the long-run inflation differential and (2) the long-run change in the real exchange rate. He argues that the former depends on country characteristics such as openness, country size, the level of outstanding government debt, and central bank independence, and the latter on the rate of economic growth and the terms of trade. Empirical support for both channels is provided, suggesting the fruitfulness, for the analysis of exchange rates, of studying cross-sectional cross-country data.