This thesis examines the options for adopting normative and prescriptive models of exchange rate determination suitable for developed and developing countries. It also develops a new modeling approach for the determination of the exchange rate, which is suitable especially for developing countries, with the Indonesian case study. To achieve these objectives, this thesis (1) examines the exchange rate issues in a typical developing country - Indonesia, (2) develops and tests market based and shadow price of
exchange rate models for Indonesia, (3) discusses the issues and mechanism for choosing an exchange rate regime for a country, and (4) suggests an approach which is based on the consideration of all these three types of models and the choice of an appropriate exchange rate regime suitable for developing economy such as Indonesia.