What determines real exchange rates?

In this paper we present a reduced form model of the real exchange rate. Using multivariate cointegration methods, the model is implemented for the real effective exchange rates of the dollar, mark and yen, over the period 1974 to 1993. In contrast to much other research involving real exchange rates, we find evidence of significant and sensible long-run relationships for our model and also for a simplified version of this model. The estimated long-run relationships are used to produce dynamic equations and those are demonstrated to outperform a random walk and produce sensible dynamic patterns in the context of an impulse response analysis