The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates

By Philip R. Lane, G. Milesi-Ferretti. Review of Economics and Statistics, 2000

332 citations recorded by the source corpus.

The relationship between international payments and the real exchange rate-the transfer problemis a classic question in international economics. We use cross-country data on real exchange rates and a newly constructed data set on countries' net external positions to shed new light on this question. We present a simple theoretical framework that leads to testable implications for the long-run comovements of real exchange rates, net foreign assets, relative GDP and terms of trade, and cross-country and time series evidence on the subject. We show that on average countries with net external liabilities have more depreciated real exchange rates, and that the main channel of transmission seems to be the relative price of nontraded goods, rather than the relative price of traded goods, across countries.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/a8f40805705e64b4eae499288173a5c429e638f1

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Citations in the corpus

Capital Flows, Exchange Rate Flexibility, and the Real Exchange Rate (2012, background): “Fiscal policy, measured by government consumption, is also considered a main determinant of the REER by some authors, but some papers focusing on the transfer problem do not consider this variable (Lane and Milesi-Ferretti, 2004).”
A post Keynesian framework of exchange rate determination: a Minskyan approach (2015, background): “In other words, foreign currency liabilities exert a latent depreciation pressure on the domestic currency in order to generate the foreign exchange necessary for debt service (Keynes’s transfer problem) (Herr, 1992; Milesi-Ferreti and Lane, 2004; Riese, 2001).”
The European Sovereign Debt Crisis (2012, background): “…Bank has a 2 percent aggregate infl ation target (approximately), and the most indebted member countries are likely to have average infl ation substantially below that level in view of the correlation between domestic demand and the price level of nontradables (Lane and Milesi-Ferretti 2004).”
Real Exchange Rates in Small Open OECD and Transition Economies: Comparing Apples with Oranges? (2006, background): “Indeed, growing foreign debt may over the longer run require a real depreciation of the currency, as suggested by the “transfer problem” and as documented recently for OECD countries (Lane and Milesi-Ferretti, 2004).”
International Investment Positions and Exchange Rate Dynamics: A Dynamic Panel Analysis (2007, background): “Three of the exceptions are Cheung and Lai (2000), Taylor, Peel and Sarno (2001) and Binder, Pesaran and Sharma (2004). Taylor, Peel and Sarno (2001) propose a nonlinear model for medium- to long-run real exchange rate dynamics, capturing that mean reversion of real exchange rates would only occur i”