With the shift to a system of floating exchange rates among major currencies in 1973, there was a shift of emphasis from the external balance to the exchange rate determination. Attempts have been made to explain the behavior of the exchange rate both theoretically and empirically over the last 20 years. Most models could not explain what happened, as in the 1980s, when the exchange rate moved a lot. Alternative models based on different approaches give different explanations and suggest different policies. This study examines the implications of the models to see what light the empirical results shed on the issues. Results of this study indicate that both monetary and real factors are important in explaining the behavior of the exchange rate, but the results generally support the view of the monetary approach.