Determinants of the real exchange rate in a small open economy: Evidence from Canada

► We developed a real exchange rate model for a small-open economy. ► The model was tested on Canadian data for the period 1972-2010. ► It was found that the model performs very well in both long and short runs. ► None of the domestic fiscal variables has any statistically significant impact on the growth of the real exchange rate over the short-run. ► The change in interest rate and the growth of the money supply have a negative impact on the growth of the real exchange rate.