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

  • S. Holle
  • M. Demertzis

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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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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  1. Parha Deb & Salim M. Darbar, 1999. "Linkages Among Asset Markets in the United States: Tests in a Bivariate GARCH Framework," IMF Working Papers 99/158, International Monetary Fund.
  2. Philip R. Lane & Gian-Maria Milesi-Ferretti, 2002. "External Wealth, the Trade Balance, and the Real Exchange Rate," IMF Working Papers 02/51, International Monetary Fund.
  3. Jaewoo Lee & Menzie D. Chinn, 1998. "The Current Account and the Real Exchange Rate: A Structural VAR Analysis of Major Currencies," NBER Working Papers 6495, National Bureau of Economic Research, Inc.
  4. Joshua Aizenman, 1983. "A Theory of Current Account and Exchange Rate Determinations," NBER Working Papers 1177, National Bureau of Economic Research, Inc.
  5. Pagan, Adrian, 1986. "Two Stage and Related Estimators and Their Applications," Review of Economic Studies, Wiley Blackwell, vol. 53(4), pages 517-38, August.
  6. Masson, Paul R. & Kremers, Jeroen & Horne, Jocelyn, 1994. "Net foreign assets and international adjustment: The United States, Japan and Germany," Journal of International Money and Finance, Elsevier, vol. 13(1), pages 27-40, February.
  7. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 1999. "The External Wealth of Nations: Measures of Foreign Assets and Liabilities for Industrial and Developing Countries," CEPR Discussion Papers 2231, C.E.P.R. Discussion Papers.
  8. Philip R. Lane & Gian-Maria Milesi-Ferretti, 2000. "External Capital Structure: Theory and Evidence," IMF Working Papers 00/152, International Monetary Fund.
  9. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
  10. Massad, Carlos, 1983. "The real cost of the external debt for the creditor and for the debtor," Revista CEPAL, United Nations Economic Commission for Latin America and the Caribbean (ECLAC), April.
  11. Burda, Michael & Wyplosz, Charles, 2009. "Macroeconomics: A European Text," OUP Catalogue, Oxford University Press, edition 5, number 9780199236824.
  12. Alan M. Taylor, 2002. "A Century of Current Account Dynamics," NBER Working Papers 8927, National Bureau of Economic Research, Inc.
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