What determines the nominal exchange rate? Some cross-sectional evidence

In this paper the determination of long-run movements in nominal exchange r ates across countries are examined. We model the long-run movement in the n ominal exchange rate as depending on (i) the long-run inflation differentia l; and (ii) the long-run change in the real exchange rate. We argue that th e former depends on country characteristics such as openness, country size, the level of outstanding government debt, and central bank independence, a nd the latter on the rate of economic growth and the terms of trade. Empiri cal support for both channels is provided, suggesting the fruitfulness, for the analysis of exchange rates, of studying cross-sectional cross-country data.