Real exchange rates, the trade balance and net foreign assets: long-run relationships and measures of misalignment

Zhang, G. and MacDonald, R. (2014) Real exchange rates, the trade balance and net foreign assets: long-run relationships and measures of misalignment. Open Economies Review, 25(4), pp. 635-653. (doi: 10.1007/s11079-013-9294-4)

Abstract

In this paper we estimate equilibrium exchange rates for 23 OECD countries and four less mature economies in a panel data setting. Our empirical analysis demonstrates significant links between the trade balance and net foreign assets, and between real exchange rates and the trade balance, rather than between real exchange rates and net foreign asset, as predicted by the model of Lane and Milessi-Ferretti (2002). Our study indicates that, in terms of the association between real exchange rates and trade balance, there is heterogeneity between the emerging market economies and the OECD countries. Finally, we construct various measures of exchange rate misalignment for all the exchange rates included in our panels.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: MacDonald, Professor Ronald and Zhang, Dr Guangfeng
• Authors: Zhang, G., and MacDonald, R.
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: Open Economies Review
• Publisher: Springer
• ISSN: 0923-7992
• ISSN (Online): 1573-708X