This paper by Rudiger Dornbusch and Stanley Fischer develops a model of exchange rate determination that integrates relative prices, expectations, and asset markets, emphasizing the relationship between exchange rates and the current account. The model extends earlier theories by incorporating rational expectations and the current account as key determinants of the exchange rate. It differs from previous models by assuming a differentiated product with endogenous world relative prices and considering the effects of anticipated future disturbances. The paper is structured into four sections. Section I presents a static expectations model, analyzing the short-run equilibrium in a small open economy with flexible prices and full employment. It shows how the exchange rate and current account are determined by the terms of trade and external asset positions. Section II extends the model to perfect foresight, demonstrating the dynamic adjustment process under rational expectations. Section III examines the impact of anticipated disturbances, such as changes in money supply or exports, on exchange rates and current accounts. Section IV concludes by discussing the model's implications and its contributions to the literature on exchange rate dynamics.This paper by Rudiger Dornbusch and Stanley Fischer develops a model of exchange rate determination that integrates relative prices, expectations, and asset markets, emphasizing the relationship between exchange rates and the current account. The model extends earlier theories by incorporating rational expectations and the current account as key determinants of the exchange rate. It differs from previous models by assuming a differentiated product with endogenous world relative prices and considering the effects of anticipated future disturbances. The paper is structured into four sections. Section I presents a static expectations model, analyzing the short-run equilibrium in a small open economy with flexible prices and full employment. It shows how the exchange rate and current account are determined by the terms of trade and external asset positions. Section II extends the model to perfect foresight, demonstrating the dynamic adjustment process under rational expectations. Section III examines the impact of anticipated disturbances, such as changes in money supply or exports, on exchange rates and current accounts. Section IV concludes by discussing the model's implications and its contributions to the literature on exchange rate dynamics.