Long-run determinants of the Irish real exchange rate

Smooth adjustment to real exchange rate shifts is one of the major challenges facing the Irish economy under EMU. Rather than assume purchasing power parity, the long-run real exchange rate is modelled as time-varying, being determined by relative output levels, the terms of trade and the net foreign asset position. It is shown that these factors account for a large proportion of the long-run movement in the Irish real exchange rate.