Working Paper: CEPR ID: DP2511
Authors: Philip R. Lane; Gian Maria Milesi-Ferretti
Abstract: The relationship between international payments and the real exchange rate - the ?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 on the long-run co-movements 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 work through the relative price of nontraded goods, rather than through the relative price of traded goods across countries.
Keywords: net foreign assets; real exchange rates; terms of trade
JEL Codes: F21; F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| net foreign assets (F30) | real exchange rates (F31) |
| relative price of nontradables (F16) | real exchange rates (F31) |
| country characteristics (O57) | transfer effect (F16) |
| equity financing (G32) | transfer effect (F16) |