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The validity of several of the benchmark models and the main hypothesis in international macroeconomics--such as the Mundell-Fleming models of the 1 960s, Dornbusch's overshooting exchange rate hypothesis, and the more recent New Open Economy Macroeconomics literature--also depend on the answers to these questions.
The present paper reviews the key contributions in new open economy macroeconomics in the last five to six years, also assessing how the intellectual debate stimulated by OR has led to models that reflect reality more satisfactorily over time.
He shows that the impact of asymmetric sectoral productivity growth on the real exchange rate depends heavily on the market structure, and that the models of new open economy macroeconomics can be reconciled with the Balassa-Samuelson effect only if pricing to market is added to models.