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Mr. Philip R. Lane

Abstract

The dramatic increase in international financial integration has been one of the salient global economic developments in recent years. Countries have accumulated substantial cross-border holdings, and there have been sizable shifts in the composition of asset and liability positions, with attendant revisions in the risk profiles of individual economies. In particular, the size of countries’ external portfolios is now such that fluctuations in exchange rates and asset prices cause very significant reallocations of wealth across countries. And the emergence of large external imbalances—itself made easier by the decline in home bias—has led to renewed interest in the international adjustment mechanism and the dual role played by exchange rates in influencing both net capital flows and net capital gains on external holdings. 2

Mr. Philip R. Lane

Abstract

Without doubt, the collapse of the communist bloc and the dissolution of the Soviet Union during 1989–1991 represented the largest regime change experienced in the world since the 1940s. In terms of economic policy, the countries that emerged from the Soviet bloc faced major challenges in terms of re-molding institutions and markets to deliver growth and prosperity for their citizens. The scale of the adjustment problem was most acute for the countries in the former Soviet Union. These countries had economic structures that were directed toward fulfilling specialized roles within the Soviet central planning system: for this group, the challenge of building self-functioning market-based economies was especially severe.

Mr. Gian M Milesi-Ferretti and Mr. Philip R. Lane
The relationship between international payments and the real exchange rate—the “transfer problem”—is a classic question in international economics. We use new data on countries’ net external positions together with real exchange rate data to shed light on this question. We present a model yielding testable implications on the long-run co-movements of real exchange rates, external positions, relative GDP and terms of trade, and cross-country and time-series evidence on the subject. Countries with net external liabilities are found to have more depreciated real exchange rates, with the main channel of transmission working through the relative price of nontraded goods.
Mr. Gian M Milesi-Ferretti and Mr. Philip R. Lane
Mr. Philip R. Lane and Mr. Gian M Milesi-Ferretti
Mr. Philip R. Lane and Mr. Gian M Milesi-Ferretti
This paper examines the link between the net foreign asset position, the trade balance and the real exchange rate. In particular, it decomposes the impact of a country's net foreign asset position ("external wealth") on its long-run real exchange rate into two mechanisms: the relation between external wealth and the trade balance; and, holding other determinants fixed, a relation between the trade balance and the real exchange rate. It also provides additional evidence that the relative price of nontradables is an important channel linking the trade balance and the real exchange rate.
Mr. Philip R. Lane and Mr. Gian M Milesi-Ferretti
Mr. Philip R. Lane and Mr. Gian M Milesi-Ferretti

This paper examines the link between the net foreign asset position, the trade balance and the real exchange rate. In particular, it decomposes the impact of a country's net foreign asset position ("external wealth") on its long-run real exchange rate into two mechanisms: the relation between external wealth and the trade balance; and, holding other determinants fixed, a relation between the trade balance and the real exchange rate. It also provides additional evidence that the relative price of nontradables is an important channel linking the trade balance and the real exchange rate.

Mr. Philip R. Lane and Mr. Gian M Milesi-Ferretti
Mr. Philip R. Lane and Mr. Gian M Milesi-Ferretti

International financial integration allows countries to become net creditors or net debtors with respect to the rest of the world. In this paper, we show that a small set of fundamentals-shifts in relative output levels, the stock of public debt and demographic factors-can do much to explain the evolution of net foreign asset positions. In addition, we highlight the role that "external wealth" plays in determining the behaviour of the trade balance, and we provide some evidence that a portfolio balance effect exists: real interest rate differentials are inversely related to net foreign asset positions.