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

_IMF Working Papers, March 1, 2002_

## Source details

**Canonical URL:** [External Wealth, the Trade Balance, and the Real Exchange Rate](https://www.imf.org/en/publications/wp/issues/2016/12/30/external-wealth-the-trade-balance-and-the-real-exchange-rate-15692)

## Other formats

- [Markdown version](/en/publications/wp/issues/2016/12/30/external-wealth-the-trade-balance-and-the-real-exchange-rate-15692/index.md)
- [Structured JSON version](/en/publications/wp/issues/2016/12/30/external-wealth-the-trade-balance-and-the-real-exchange-rate-15692/index.json)
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## Bibliographic details
- Authors: Philip R. Lane, Gian M Milesi-Ferretti
- Published: March 1, 2002
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451847123.001

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### Core summary
- This paper examines the link between the net foreign asset position ("external wealth"), the trade balance, and the long-run real exchange rate.
- The analysis decomposes the impact of a country's net foreign asset position on its long-run real exchange rate into two mechanisms:
  - the relation between external wealth and the trade balance; and
  - holding other determinants fixed, the relation between the trade balance and the real exchange rate.
- The paper provides additional evidence that the relative price of nontradables is an important channel linking the trade balance and the real exchange rate.

### Main findings and empirical focus
- Decomposition result:
  - External wealth affects the long-run real exchange rate through its effect on the trade balance.
  - Conditional on other determinants, the trade balance influences the real exchange rate.
- Channel identification:
  - The relative price of nontradables is identified as an important channel linking the trade balance to the real exchange rate.
- Subject areas and keywords emphasized in the study:
  - Foreign assets
  - Foreign currency exposure
  - Real exchange rates
  - Terms of trade
  - Trade balance
  - asset position, debtor country, output growth rate, trade balance coefficient, WP

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## Content in this bundle

- **External Wealth, the Trade Balance, and the Real Exchange Rate - WP/02/51**
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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/external-wealth-the-trade-balance-and-the-real-exchange-rate-15692_