External Wealth, the Trade Balance, and the Real Exchange Rate

Author/Editor:

Philip R. Lane ; Gian M Milesi-Ferretti

Publication Date:

March 1, 2002

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper examines the link between the net foreign asset position, the trade balance and the real exchange rate. In particular, it decomposes 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 other determinants fixed, a relation between the trade balance and the real exchange rate. It also provides additional evidence that the relative price of nontradables is an important channel linking the trade balance and the real exchange rate.

Series:

Working Paper No. 02/51

Subject:

English

Publication Date:

March 1, 2002

ISBN/ISSN:

9781451847123/1018-5941

Stock No:

WPIEA0512002

Format:

Paper

Pages:

35

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