External Wealth, the Trade Balance and the Real Exchange Rate

40 Pages Posted: 3 Feb 2002  

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)

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Date Written: January 2002

Abstract

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.

Keywords: Net foreign assets, trade balance, real exchange rate

JEL Classification: F21, F31, F41

Suggested Citation

Lane, Philip R. and Milesi-Ferretti, Gian Maria, External Wealth, the Trade Balance and the Real Exchange Rate (January 2002). CEPR Discussion Paper No. 3153. Available at SSRN: https://ssrn.com/abstract=299247

Philip R. Lane (Contact Author)

Trinity College (Dublin) - Department of Economics ( email )

Trinity College
Dublin 2
Ireland
+353 1 608 2259 (Phone)
+353 1 677 2503 (Fax)

Centre for Economic Policy Research (CEPR)

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London, EC1V 3PZ
United Kingdom

Gian Maria Milesi-Ferretti

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

International Monetary Fund (IMF) ( email )

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Room 9-700
Washington, DC 20431
United States
202-623-7441 (Phone)
202-589-7441 (Fax)

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