External Wealth, the Trade Balance and the Real Exchange Rate
Philip R. Lane
Trinity College (Dublin) - Department of Economics; Centre for Economic Policy Research (CEPR)
Gian Maria Milesi-Ferretti
International Monetary Fund (IMF); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
CEPR Discussion Paper No. 3153
We examine the link between the net foreign asset position, the trade balance and the real exchange rate. In particular, we decompose the impact of a country's net foreign asset position ("external wealth") on its long-run real exchange rate into two mechanisms: the relation between external wealth and the trade balance; and, holding fixed other determinants, a negative relation between the trade balance and the real exchange rate. We also provide additional evidence that the relative price of nontradables is an important channel linking the trade balance and the real exchange rate.
Number of Pages in PDF File: 40
Keywords: Net foreign assets, trade balance, real exchange rate
JEL Classification: F21, F31, F41
Date posted: February 3, 2002
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