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

By Philip R. Lane, G. Milesi-Ferretti. Social Science Research Network, 2002

289 citations recorded by the source corpus.

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 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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Citations in the corpus

Real Exchange Rates in Small Open OECD and Transition Economies: Comparing Apples with Oranges? (2006, background): “Recent intertemporal models with optimizing agents develop this link between net foreign assets and the real exchange rate, where the income transfer is connected with a depreciated currency in real terms in the country servicing the debt (Lane and Milesi-Ferretti, 2002, and Thoenissen, 2005).”
Market Freedom and the Global Recession (2011, background): “For example, while Shumpeterian views of the business cycle suggest a positive relation (eg Caballero and Hammour (1994)), the empirical findings by Ramey and Ramey (1995) point to a negative one while more recent evidence remains mixed (see Badinger (2010)).”