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

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  • Mr. Gian M Milesi-Ferretti
  • Mr. Philip R. Lane

Abstract

The relationship between international payments and the real exchange rate—the “transfer problem”—is a classic question in international economics. We use new data on countries’ net external positions together with real exchange rate data to shed light on this question. We present a model yielding testable implications on the long-run co-movements of real exchange rates, external positions, relative GDP and terms of trade, and cross-country and time-series evidence on the subject. Countries with net external liabilities are found to have more depreciated real exchange rates, with the main channel of transmission working through the relative price of nontraded goods.

Suggested Citation

  • Mr. Gian M Milesi-Ferretti & Mr. Philip R. Lane, 2000. "The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates," IMF Working Papers 2000/123, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2000/123
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    More about this item

    Keywords

    WP; Real exchange rates; net foreign assets; terms of trade; transfer effect; open economy; WPI indices; CPI-RER to the WPI-RER; income group; CPI to WPI ratio; WPI ratio; traded goods; exchange rate regime choice; net foreign asset; simple regression; nominal exchange rate; Foreign assets; Foreign currency exposure; Global;
    All these keywords.

    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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