Net foreign assets and real exchange rates revisited
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-countr...
| Main Authors: | , |
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| Format: | Article |
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Oxford University Press
2014
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| Online Access: | https://eprints.nottingham.ac.uk/52525/ |
| _version_ | 1848798746120290304 |
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| author | Bleaney, Michael Tian, Mo |
| author_facet | Bleaney, Michael Tian, Mo |
| author_sort | Bleaney, Michael |
| building | Nottingham Research Data Repository |
| collection | Online Access |
| description | 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. |
| first_indexed | 2025-11-14T20:24:40Z |
| format | Article |
| id | nottingham-52525 |
| institution | University of Nottingham Malaysia Campus |
| institution_category | Local University |
| last_indexed | 2025-11-14T20:24:40Z |
| publishDate | 2014 |
| publisher | Oxford University Press |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | nottingham-525252020-05-04T20:13:08Z https://eprints.nottingham.ac.uk/52525/ Net foreign assets and real exchange rates revisited Bleaney, Michael Tian, Mo 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. Oxford University Press 2014-10 Article PeerReviewed Bleaney, Michael and Tian, Mo (2014) Net foreign assets and real exchange rates revisited. Oxford Economic Papers, 66 (4). pp. 1145-1158. ISSN 1464-3812 https://academic.oup.com/oep/article/66/4/1145/2362156 doi:10.1093/oep/gpu014 doi:10.1093/oep/gpu014 |
| spellingShingle | Bleaney, Michael Tian, Mo Net foreign assets and real exchange rates revisited |
| title | Net foreign assets and real exchange rates revisited |
| title_full | Net foreign assets and real exchange rates revisited |
| title_fullStr | Net foreign assets and real exchange rates revisited |
| title_full_unstemmed | Net foreign assets and real exchange rates revisited |
| title_short | Net foreign assets and real exchange rates revisited |
| title_sort | net foreign assets and real exchange rates revisited |
| url | https://eprints.nottingham.ac.uk/52525/ https://eprints.nottingham.ac.uk/52525/ https://eprints.nottingham.ac.uk/52525/ |