Relationship between external wealth, trade balance, and the real exchange rate : a case study on the US.

Lane and Milesi-Ferreti (2002) show that a country’s external wealth, trade balance and the real exchange rate are interrelated. They shown that in the long-run, there is a negative relation between the trade balance and the real exchange rate. And that the magnitude of the trade balance coefficient is directly proportional to country size. Inspired by the work of Lane and Milesi-Ferreti (2002), we aim to replicate their work using data of 20 OECD countries from 1970 to 2002 and draw the link between a country’s net foreign asset and its impact on real exchange rate. Besides, we also extend the data set to 2007. Additionally, we work on a case study of the United States (US) and investigate the relationship between the US’s trade position over the years with its 5 major trading partners such as Canada, Japan, China, Mexico and Germany. Finally, we examine the relationship between price of gold and the US dollar exchange rate.Bachelor of Art