Working Paper: CEPR ID: DP3153
Authors: Philip R. Lane; Gian Maria Milesi-Ferretti
Abstract: We examine the link between the net foreign asset position, the trade balance and the real exchange rate. In particular, we decompose the impact of a country?s net foreign asset position (?external wealth?) on its long-run real exchange rate into two mechanisms: the relation between external wealth and the trade balance; and, holding fixed other determinants, a negative relation between the trade balance and the real exchange rate. We also provide additional evidence that the relative price of nontradables is an important channel linking the trade balance and the real exchange rate.
Keywords: net foreign assets; real exchange rate; trade balance
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 |
|---|---|
| trade balance (TB) (F14) | real exchange rate (RER) (F31) |
| net foreign assets (NFA) (F30) | real exchange rate (RER) (F31) |
| trade balance (TB) (F14) | net foreign assets (NFA) (F30) |
| net foreign assets (NFA) (F30) | trade balance (TB) (F14) |