Net foreign assets and real exchange rates revisited

Michael Bleaney and Mo Tian

Oxford Economic Papers, 2014, vol. 66, issue 4, 1145-1158

Abstract: Theory suggests a significant positive relationship in long-run equilibrium between the net foreign assets (NFA) of a country and its real exchange rate. 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 when net foreign assets are scaled by GDP, 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 nevertheless still support the existence of a long-run positive relationship between NFA and real exchange rates.

Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (17)

Downloads: (external link)
http://hdl.handle.net/10.1093/oep/gpu014 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:oxecpp:v:66:y:2014:i:4:p:1145-1158.

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

Oxford Economic Papers is currently edited by James Forder and Francis J. Teal

More articles in Oxford Economic Papers from Oxford University Press Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK.
Bibliographic data for series maintained by Oxford University Press ().