Long-Run Determinants of the Real Exchange Rate: A Stock-Flow Perspective
IMF Working Papers, August 1, 1994
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- Long-Run Determinants of the Real Exchange Rate: A Stock-Flow Perspective
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Bibliographic details
- Authors: Hamid Faruqee
- Published: August 1, 1994
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451851359.001
Overview
- Paper examines the long-run determinants of the real exchange rate from a stock-flow perspective.
- Empirical analysis estimates a long-run relationship between the real exchange rate, net foreign assets and other factors affecting trade flows.
- Using postwar data for the United States and Japan, cointegration analysis supports the finding that structural factors underlying each country’s net trade and net foreign asset positions determine the long-run path for the real value of the dollar and the yen.
- Empirical analysis also provides estimates for the underlying stochastic trend in each real exchange rate series.
Empirical approach and methodology
- Framework: stock-flow perspective linking real exchange rate to net foreign assets and trade-flow determinants.
- Econometric method: cointegration analysis to estimate long-run relationships and underlying stochastic trends.
- Data scope: postwar data for the United States and Japan.
Key findings
- Structural factors underlying net trade and net foreign asset positions determine the long-run path for the real value of the dollar and the yen.
- Cointegration analysis supports a stable long-run relationship between:
- the real exchange rate,
- net foreign assets,
- other factors affecting trade flows.
- The empirical analysis yields estimates for the underlying stochastic trend in each real exchange rate series.
Subject coverage and keywords
- Subjects: Balance of payments; Current account; Exchange rate arrangements; External position; Foreign assets; Foreign exchange; Production; Productivity; Real effective exchange rates; Real exchange rates.
- Keywords: balance of payments equilibrium condition; Current account; current account position; exchange rate; Exchange rate arrangements; exchange rate movement; Foreign assets; Global; level of significance; net trading position; point estimate; Productivity; productivity differential; real exchange rate; Real exchange rates; real value; stock variable; sustainable balance of payments position; terms of trade; time series; Western Europe; WP.