Abstract

This paper presented a critical appraisal of the justifications for the choice of particular variables as real exchange rate fundamentals. The model-based approach was focused. The criteria for the exercise centered on the nature of variables and the pattern of effect. The cases for exchange control, trade restrictions and government expenditure on untradeable goods as long run fundamentals were tenuous and could hardly be defended theoretically while capital flows were found admissible only after some adjustments. Productivity growth differentials boasted impeccable credentials and should not be ignored. All the variables making the final list satisfied the established ground rules.

Keywords: Real exchange rate; Fundamentals; Non-technical approach