External Wealth, the Trade Balance, and the Real Exchange Rate

35 Pages Posted: 21 Feb 2007

See all articles by Philip R. Lane

Philip R. Lane

Trinity College (Dublin) - Department of Economics; Centre for Economic Policy Research (CEPR); Central Bank of Ireland

Gian Maria Milesi-Ferretti

International Monetary Fund (IMF); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2002

Abstract

This paper examines the link between the net foreign asset position, the trade balance and the real exchange rate. In particular, it decomposes 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 other determinants fixed, a relation between the trade balance and the real exchange rate. It also provides 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 (March 2002). IMF Working Paper, Vol. , pp. 1-35, 2002. Available at SSRN: https://ssrn.com/abstract=879454

Philip R. Lane (Contact Author)

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

Trinity College
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Centre for Economic Policy Research (CEPR)

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Central Bank of Ireland ( email )

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Gian Maria Milesi-Ferretti

International Monetary Fund (IMF) ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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