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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-the transfer problem-is a classic question in international economics. 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 question. We present a simple theoretical framework that leads to testable implications for the long-run comovements of real exchange rates, net foreign assets, relative GDP and 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 be the relative price of nontraded goods, rather than the relative price of traded goods, across countries. © 2004 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • 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.
  • Handle: RePEc:tpr:restat:v:86:y:2004:i:4:p:841-857
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    More about this item

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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