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

Author(s): Philip R. Lane and Gian Maria Milesi-Ferretti

Publication Date: January 2002

Keyword(s): net foreign assets, real exchange rate and trade balance

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Lane, P and Milesi-Ferretti, G. 2002. 'External Wealth, the Trade Balance and the Real Exchange Rate'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=3153