Net Foreign Assets and Equilibrium Exchange Rates: Panel Evidence

34 Pages Posted: 9 Jan 1997

Date Written: December 1996

Abstract

By exploiting the information in a panel data set, this paper is able to construct more powerful tests of various hypotheses on the determinants of real exchange rates than would be possible with single-country time-series data. Focusing on annual data for 20 industrial countries from 1973 through 1995, there are three major results. First, the evidence for a stationary real exchange rate is stronger when the exchange rate is defined in terms of wholesale prices than consumer prices, presumably because of the greater tradability of wholesale commodities. Second, the half-life of shocks to the real exchange rate is between two and three years. Third, there is a significant and robust relationship between real exchange rates and net foreign assets.

JEL Classification: F21, F31

Suggested Citation

Gagnon, Joseph, Net Foreign Assets and Equilibrium Exchange Rates: Panel Evidence (December 1996). Available at SSRN: https://ssrn.com/abstract=1893 or http://dx.doi.org/10.2139/ssrn.1893

Joseph Gagnon (Contact Author)

Peterson Institute ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

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