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

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  • S. Holle
  • M. Demertzis

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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File URL: http://www.dnb.nl/binaries/wo0716_tcm46-146008.pdf
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Bibliographic 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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Keywords: Net foreign assets; trade balance; rate of return differential;

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  1. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
  2. Pagan, Adrian, 1986. "Two Stage and Related Estimators and Their Applications," Review of Economic Studies, Wiley Blackwell, vol. 53(4), pages 517-38, August.
  3. Philip Lane & Gian Maria Milesi-Ferretti, 2001. "THE EXTERNAL WEALTH OF NATIONS: Measures of Foreign Assets and Liabilities For Industrial and Developing Countries," Trinity Economics Papers 20014, Trinity College Dublin, Department of Economics.
  4. Parha Deb & Salim M. Darbar, 1999. "Linkages Among Asset Markets in the United States," IMF Working Papers 99/158, International Monetary Fund.
  5. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2000. "External Capital Structure: Theory and Evidence," CEPR Discussion Papers 2583, C.E.P.R. Discussion Papers.
  6. Philip R. Lane & Gian-Maria Milesi-Ferretti, 2000. "External Capital Structure," IMF Working Papers 00/152, International Monetary Fund.
  7. Jocelyn Horne & Paul R. Masson & Jeroen J. M. Kremers, 1993. "Net Foreign Assets and International Adjustment," IMF Working Papers 93/33, International Monetary Fund.
  8. Lee, J. & Chinn, M.D., 1998. "The Current Account and the Real Exchange Rate: A Structural VAR Analysis of Major Currencies," Papers 97-98-17, California Irvine - School of Social Sciences.
  9. Gian-Maria Milesi-Ferretti & Philip R. Lane, 1999. "The External Wealth of Nations," IMF Working Papers 99/115, International Monetary Fund.
  10. Joshua Aizenman, 1984. "A Theory of Current Account and Exchange Rate Determinations," NBER Working Papers 1177, National Bureau of Economic Research, Inc.
  11. Taylor, Alan M., 2002. "A century of current account dynamics," Journal of International Money and Finance, Elsevier, vol. 21(6), pages 725-748, November.
  12. Burda, Michael & Wyplosz, Charles, 2012. "Macroeconomics: A European Text," OUP Catalogue, Oxford University Press, edition 6, number 9780199608645.
  13. 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.
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