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Net foreign assets and real exchange rates revisited

Bleaney, Michael; Tian, Mo

Authors

Michael Bleaney

MO TIAN Mo.Tian@nottingham.ac.uk
Assistant Professor



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.

Journal Article Type Article
Publication Date Oct 1, 2014
Journal Oxford Economic Papers
Print ISSN 0030-7653
Electronic ISSN 1464-3812
Publisher Oxford University Press
Peer Reviewed Peer Reviewed
Volume 66
Issue 4
APA6 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
DOI https://doi.org/10.1093/oep/gpu014
Publisher URL https://academic.oup.com/oep/article/66/4/1145/2362156
Copyright Statement Copyright information regarding this work can be found at the following address: http://eprints.nottingh.../end_user_agreement.pdf
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.

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Copyright Statement
Copyright information regarding this work can be found at the following address: http://eprints.nottingham.ac.uk/end_user_agreement.pdf





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