This paper attempts to explain the movements of Zambia’s real effective exchange rate
using a vector error correction model and quarterly time series data between 1973 and
1997. The study results are similar to most studies about the nature of the determinants of
the real exchange rate. Through the use of purchasing power parity tests, impulse response
and variance decomposition functions, the study indicates that Zambia’s real effective
exchange rate depends significantly on the prevailing real fundamentals, price differentials
and real shocks