EQUILIBRIUM REAL EXCHANGE-RATES - CLOSED-FORM THEORETICAL SOLUTIONS AND SOME EMPIRICAL-EVIDENCE

This paper generates closed-form theoretical solutions for the relatio nships among the real exchange rate, relative per capita consumption, and relative wealth in a stochastic dynamic general equilibrium model of two countries' representative consumers. The solutions offer insigh t into the robust cross-sectional relationship between relative per ca pita GDPs and relative national price levels established in Kravis and Lipsey (1983, 1987, 1988) in a manner consistent with equilibrium exc hange rate theories and the productivity-differentials model of Balass a (1964) and Samuelson (1964). Application of panel data from Summers and Heston (1988) to the model's structural equations yields economica lly-plausible estimates of the elasticity of intertemporal substitutio n, the relative importance of non-tradables in consumption, and the ra te of time preference in several OECD countries relative to that in th e United States. (JEL F31). (C) 1997 Elsevier Science Ltd.