Net foreign assets and equilibrium exchange rates: panel evidence
No 574, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)
By exploiting the information in a panel data set, this paper is able to construct more powerful tests of various hypotheses on the determinants of real exchange rates than would be possible with single-country time-series data. Focusing on annual data for 20 industrial countries from 1973 through 1995, there are three major results. First, the evidence for a stationary real exchange rate is stronger when the exchange rate is defined in terms of wholesale prices than consumer prices, presumably because of the greater tradability of wholesale commodities. Second, the half-life of shocks to the real exchange rate is between two and three years. Third, there is a significant and robust relationship between real exchange rates and net foreign assets.
Keywords: Foreign exchange rates; Investments, Foreign (search for similar items in EconPapers)
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