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

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  • Ph.R. Lane
  • G.M. Milesi-Ferretti

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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File URL: http://www.dnb.nl/binaries/sr080_tcm46-146857.pdf
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Bibliographic Info

Paper provided by Netherlands Central Bank in its series DNB Staff Reports (discontinued) with number 80.

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Length: 45 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:dnb:staffs:80

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Keywords: Net foreign assets; trade balance; real exchange rate.;

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