A Post Keynesian framework for real exchange rate determination

Abstract

This chapter presents an overview of the Post Keynesian (PK) analysis of the determinants of exchange rate movements. Even though it focuses on nominal exchange rate, we show that it can encompass a real exchange rate (RER) framework. This is important because the RER is an important variable in some PK growth and income distribution models. Up to this point, PK theory has focused on nominal exchange rate movements. Barbosa et al. extended this framework to the analysis of the RER, suggesting that capital flows and external fragility, consisted of the stock of short-run liabilities, are driving forces of its dynamics in the long-run as well. In this scenario, as the RER plays an important role in PK models, it is important to design properly exchange rate policies. After discussing the exchange rate determination, we briefly present this issue.