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External Wealth and the Trade Balance: A Time-Series Analysis for the Netherlands

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Author Info
S. Holle
M. Demertzis

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Abstract

This paper investigates the effect of the external wealth position of the Netherlands on the Dutch trade balance. Contrary to intuition which allows net creditors to run a trade deficit, the Netherlands has over a period of years be running trade surpluses. To explain this paradox, not unique to the Dutch case, we use the model applied by Lane and Milesi-Ferretti to evaluate the role of a differential between rates of return on foreign assets and foreign liabilities. The results of our time-series analysis suggest that the effect of external wealth becomes more negative as foreign assets become relatively more lucrative. In addition, negative valuation changes of Dutch net external wealth due to an increase in the value of foreign liabilities during the nineties, can explain the trade balance. Finally, a comparison with Denmark shows an equivalent influence of the rates of return in the way wealth affects the trade balance.

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Publisher Info
Paper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 716.

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Date of creation: 2002
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Handle: RePEc:dnb:wormem:716

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Related research
Keywords: Net foreign assets; trade balance; rate of return differential;

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Find related papers by JEL classification:
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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  1. Jaewoo Lee & Menzie D. Chinn, 1998. "The Current Account and the Real Exchange Rate: A Structural VAR Analysis of Major Currencies," NBER Working Papers 6495, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Alan M. Taylor, 2002. "A Century of Current Account Dynamics," NBER Working Papers 8927, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2002. "External wealth, the trade balance, and the real exchange rate," European Economic Review, Elsevier, vol. 46(6), pages 1049-1071, June. [Downloadable!] (restricted)
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  4. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics. [Downloadable!]
  5. Gian Maria Milesi-Ferretti & Philip R. Lane, 1999. "The External Wealth of Nations - Measures of Foreign Assets and Liabilities for Industrial and Developing Countries," IMF Working Papers 99/115, International Monetary Fund.
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  6. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2000. "External Capital Structure: Theory and Evidence," CEPR Discussion Papers 2583, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Pagan, Adrian, 1986. "Two Stage and Related Estimators and Their Applications," Review of Economic Studies, Blackwell Publishing, vol. 53(4), pages 517-38, August. [Downloadable!] (restricted)
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  8. Paul R. Masson & Jeroen J. M. Kremers & Jocelyn Horne, 1993. "Net Foreign Assets and International Adjustment: The United States, Japan, and Germany," IMF Working Papers 93/33, International Monetary Fund.
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  9. Salim M. Darbar & Parha Deb, 1999. "Linkages Among Asset Markets in the United States - Tests in a Bivariate GARCH Framework," IMF Working Papers 99/158, International Monetary Fund.
  10. Aizenman, Joshua, 1983. "A theory of current account and exchange rate determinations," European Economic Review, Elsevier, vol. 23(3), pages 261-280, September. [Downloadable!] (restricted)
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This page was last updated on 2009-11-11.

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