The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates
HKIMR Working Paper No. 6/2000
39 Pages Posted: 1 Feb 2006
Date Written: July 2000
The relationship between international payments and the real exchange rate--the transfer problem--is a classic question in international economics. We use new data on countries' net external positions together with real exchange rate data to shed light on this question. We present a model yielding testable implications on the long-run co-movements of real exchange rates, external positions, relative GDP and terms of trade, and cross-country and time-series evidence on the subject. Countries with net external liabilities are found to have more depreciated real exchange rates, with the main channel of transmission working through the relative price of nontraded goods.
Keywords: Real exchange rates, net foreign assets, terms of trade
JEL Classification: F21, F31, F41
Suggested Citation: Suggested Citation