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Real Exchange Rates, the Trade Balance and Net Foreign Assets: Long-Run Relationships and Measures of Misalignment

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  • Guangfeng Zhang

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  • Ronald MacDonald

Abstract

In this paper we estimate equilibrium exchange rates for 23 OECD countries and four less mature economies in a panel data setting. Our empirical analysis demonstrates significant links between the trade balance and net foreign assets, and between real exchange rates and the trade balance, rather than between real exchange rates and net foreign asset, as predicted by the model of Lane and Milessi-Ferretti ( 2002 ). Our study indicates that, in terms of the association between real exchange rates and trade balance, there is heterogeneity between the emerging market economies and the OECD countries. Finally, we construct various measures of exchange rate misalignment for all the exchange rates included in our panels. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Guangfeng Zhang & Ronald MacDonald, 2014. "Real Exchange Rates, the Trade Balance and Net Foreign Assets: Long-Run Relationships and Measures of Misalignment," Open Economies Review, Springer, vol. 25(4), pages 635-653, September.
  • Handle: RePEc:kap:openec:v:25:y:2014:i:4:p:635-653
    DOI: 10.1007/s11079-013-9294-4
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    References listed on IDEAS

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    1. Joshua Aizenman & Rajeswari Sengupta, 2011. "Global Imbalances: Is Germany the New China? A Skeptical View," Open Economies Review, Springer, vol. 22(3), pages 387-400, July.
    2. 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.
    3. Kaddour Hadri, 2000. "Testing for stationarity in heterogeneous panel data," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 148-161.
    4. Philip R. Lane & Gian Maria Milesi-Ferretti, 2004. "The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 841-857, November.
    5. Kappler, Marcus & Reisen, Helmut & Schularick, Moritz & Turkisch, Edouard, 2013. "The Macroeconomic Effects of Large Exchange Rate Appreciations," EconStor Open Access Articles, ZBW - Leibniz Information Centre for Economics, pages 471-494.
    6. Hall, Stephen G. & Kenjegaliev, Amangeldi & Swamy, P.A.V.B. & Tavlas, George S., 2013. "Measuring currency pressures: The cases of the Japanese yen, the Chinese yuan, and the UK pound," Journal of the Japanese and International Economies, Elsevier, vol. 29(C), pages 1-20.
    7. Pedroni, Peter, 1999. " Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 653-670, Special I.
    8. Xiangming Li, 2004. "Trade Liberalization and Real Exchange Rate Movement," IMF Staff Papers, Palgrave Macmillan, vol. 51(3), pages 553-584, November.
    9. Maeso-Fernandez, Francisco & Osbat, Chiara & Schnatz, Bernd, 2004. "Towards the estimation of equilibrium exchange rates for CEE acceding countries: methodological issues and a panel cointegration perspective," Working Paper Series 353, European Central Bank.
    10. Yin-Wong Cheung & Menzie Chinn & Eiji Fujii, 2009. "Pitfalls in Measuring Exchange Rate Misalignment," Open Economies Review, Springer, vol. 20(2), pages 183-206, April.
    11. Iscan, Talan B., 2000. "The terms of trade, productivity growth and the current account," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 587-611, June.
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    1. repec:spr:series:v:9:y:2018:i:1:d:10.1007_s13209-017-0168-7 is not listed on IDEAS
    2. repec:kap:openec:v:29:y:2018:i:5:d:10.1007_s11079-018-9477-0 is not listed on IDEAS
    3. repec:kap:openec:v:30:y:2019:i:2:d:10.1007_s11079-018-9510-3 is not listed on IDEAS
    4. Marçal, Emerson Fernandes & Zimmermann, Beatrice Aline & Mendonça, Diogo de Prince & Merlin, Giovanni Tondin, 2015. "Addressing important econometric issues on how to construct theoretical based exchange rate misalignment estimates," Textos para discussão 401, FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil).

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