Net foreign assets, real exchange rates and net exports revisited

Arbeitspapier

Theory suggests a significant positive relationship in long-run equilibrium between net foreign assets (NFA) as a proportion of GDP and real exchange rates. Empirical tests have ignored two issues: the large variation in cross-country trade/GDP ratios, which is likely to induce substantial cross-country differences in coefficients, and the reverse causality associated with valuation effects. A real exchange rate appreciation reduces the absolute value of NFA denominated in foreign currency relative to domestic GDP, because of the sizeable component of non-tradable goods in domestic GDP. This endogeneity biases the test results. New tests are implemented that address these issues. The valuation effect bias is found to be significant. The new tests support the existence of a long-run positive relationship between NFA and real exchange rates. The long-run negative relationship between NFA and net exports that existed before 1992 has broken down in the period of persistent global imbalances.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CREDIT Research Paper ; No. 13/04

Classification and Topics

• Classification: Wirtschaft ; Foreign Exchange
• Subject: current account ; exchange rates ; net foreign assets ; trade balance

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bleaney, Michael ; Tian, Mo
• Event: Veröffentlichung
• (who): The University of Nottingham, Centre for Research in Economic Development and International Trade (CREDIT)
• (where): Nottingham
• (when): 2013

Further information

• Handle: http://hdl.handle.net/10419/96354
• Last update: 10.03.2025, 11:42 AM CET