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January/February 1990, 
Vol. 72, No. 1
Posted 1990-01-01

What Do We Know About the Long-Run Real Exchange Rate?

by Cletus C. Coughlin and Kees Koedijk

Cletus C. Coughlin and Kees Koedijk review what is known about movements in one type of exchange rate, the long-run real exchange rate. Despite much research, there is no consensus on which variables cause changes in the real exchange rate. Coughlin and Koedijk review the literature to provide an elementary understanding of the three primary approaches and the variables thought to influence the long-run real exchange rate. Using a data set covering the current floating-rate period, the authors compare the three approaches empirically and conclude that none provides an adequate explanation of movements in the long-run real exchange rate.