The Real Exchange Rate and its Real Fundamentals : A Story of Success in a Nutshell

Questions regarding the volatility of the real exchange rate, its speed of adjustment to equilibrium, the direction and magnitude of permanent deviations from Purchasing Power Parity, and the relation between real exchange rates and interest rate differentials can all be addressed by models of optimizing behavior founded in the Consumption Capital Asset Pricing Model and the Ramsey-Cass-Koopmans model. As a result, the behavior of the real exchange rate encountered in the data is fully consistent with the fundamentals in these models