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

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  • Philip R. Lane

    (Trinity College Dublin and CEPR)

  • Gian Maria Milesi-Ferretti

    (International Monetary Fund and CEPR)

Abstract

The relationship between international payments and the real exchange rate¡Xthe "transfer problem"- is one of the classic questions in international economics. In this paper 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 old question. We present a simple theoretical framework that leads to empirically testable implications for the long-run co-movements of real exchange rates, net foreign assets, relative GDP and the 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 work through the relative price of nontraded goods, rather than through the relative price of traded goods across countries.

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Bibliographic Info

Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 062000.

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Length: 34 pages
Date of creation: Aug 2000
Date of revision:
Handle: RePEc:hkm:wpaper:062000

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