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

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  • Philip R. Lane
  • Gian Maria 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 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.tcd.ie/Economics/TEP/2001_papers/TEPNo21PL21.pdf
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Bibliographic Info

Paper provided by Trinity College Dublin, Department of Economics in its series CEG Working Papers with number 200113.

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Date of creation: 2001
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Handle: RePEc:tcd:tcdceg:200113

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Postal: Trinity College, Dublin 2
Phone: (+ 353 1) 6081325
Fax: 6772503
Web page: http://www.tcd.ie/Economics/
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