DP3153 External Wealth, the Trade Balance and the Real Exchange Rate
|Author(s):||Philip R. Lane, Gian Maria Milesi-Ferretti|
|Publication Date:||January 2002|
|Keyword(s):||net foreign assets, real exchange rate, trade balance|
|JEL(s):||F21, F31, F41|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=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.