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

  • Philip R. Lane

    (Trinity College Dublin and CEPR)

  • Gian Maria Milesi-Ferretti

    (International Monetary Fund and CEPR)

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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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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  1. Ken Froot & Kenneth Rogoff, . "Perspectives on PPP and Long-Run Real Exchange Rates," Working Paper 32027, Harvard University OpenScholar.
  2. Engel, C., 1996. "Accounting for U.S. Real Exchange Rate Changes," Working Papers 96-02, University of Washington, Department of Economics.
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  9. Hamid Faruqee, 1995. "Long-Run Determinants of the Real Exchange Rate: A Stock-Flow Perspective," IMF Staff Papers, Palgrave Macmillan, vol. 42(1), pages 80-107, March.
  10. Matthew B. Canzoneri & Robert E. Cumby & Behzad Diba, 1996. "Relative Labor Productivity and the Real Exchange Rate in the Long Run: Evidence for a Panel of OECD Countries," NBER Working Papers 5676, National Bureau of Economic Research, Inc.
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  12. Lane, Philip R., 1999. "The New Open Economy Macroeconomics: a Survey," CEPR Discussion Papers 2115, C.E.P.R. Discussion Papers.
  13. Paul Krugman, 1999. "Balance Sheets, the Transfer Problem, and Financial Crises," International Tax and Public Finance, Springer, vol. 6(4), pages 459-472, November.
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  19. Rui Albuquerque, 2004. "The Composition of International Capital Flows: Risk Sharing Through Foreign Direct Investment," International Finance 0405004, EconWPA.
  20. Kao, Chihwa, 1999. "Spurious regression and residual-based tests for cointegration in panel data," Journal of Econometrics, Elsevier, vol. 90(1), pages 1-44, May.
  21. 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.
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