Net foreign assets and real exchange rates revisited

Bleaney, Michael; Tian, Mo

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.

Citation

Bleaney, M., & Tian, M. (2014). Net foreign assets and real exchange rates revisited. Oxford Economic Papers, 66(4), https://doi.org/10.1093/oep/gpu014

• Journal Article Type: Article
• Acceptance Date: Feb 6, 2014
• Online Publication Date: Mar 13, 2014
• Publication Date: Oct 1, 2014
• Deposit Date: Jun 20, 2018
• Publicly Available Date: Jun 20, 2018
• Journal: Oxford Economic Papers
• Print ISSN: 0030-7653
• Electronic ISSN: 1464-3812
• Publisher: Oxford University Press
• Peer Reviewed: Peer Reviewed
• Volume: 66
• Issue: 4
• DOI: https://doi.org/10.1093/oep/gpu014
• Public URL: https://nottingham-repository.worktribe.com/output/994196
• Publisher URL: https://academic.oup.com/oep/article/66/4/1145/2362156
• Additional Information: This is a pre-copyedited, author-produced version of an article accepted for publication in Oxford Economic Papers following peer review. The version of record Michael Bleaney, Mo Tian; Net foreign assets and real exchange rates revisited, Oxford Economic Papers, Volume 66, Issue 4, 1 October 2014, Pages 1145–1158 is available online at: https://doi.org/10.1093/oep/gpu014.