Comment on R. Dornbusch, "Real Exchange Rates and Macroeconomics: A Selective Survey"

Abstract

Rudiger Dornbusch gives us a very clear, thoughtful, and somewhat provocative, survey of some selected but very central issues of exchange rates and macroeconomics. I will take the liberty of being at least as selective and take up only a few of Dornbusch's many profound points. Most of the survey deals with exchange rate determination among industrialized economies. The last section deals with real exchange rates in developing countries. The first main section concerns real exchange rates in the long run and the second exchange rates in the short run. There Dornbusch presents, discusses and evaluates four approaches to exchange rate determination: the monetary approach, the new classical approach, the equilibrium approach, and the macroeconomic approach (the last being essentially the Mundell-Fleming model with a rational-expectations asset market, that is, Dornbusch's famous overshooting model).