Open Economies Review

, Volume 25, Issue 4, pp 635–653 | Cite as

Real Exchange Rates, the Trade Balance and Net Foreign Assets: Long-Run Relationships and Measures of Misalignment

  • Guangfeng Zhang
  • Ronald MacDonald
Research Article


In this paper we estimate equilibrium exchange rates for 23 OECD countries and four less mature economies in a panel data setting. Our empirical analysis demonstrates significant links between the trade balance and net foreign assets, and between real exchange rates and the trade balance, rather than between real exchange rates and net foreign asset, as predicted by the model of Lane and Milessi-Ferretti (2002). Our study indicates that, in terms of the association between real exchange rates and trade balance, there is heterogeneity between the emerging market economies and the OECD countries. Finally, we construct various measures of exchange rate misalignment for all the exchange rates included in our panels.


Real exchange rates Trade balance Net foreign assets Misalignment Panel data 



The authors are very grateful to George Tavlas for his helpful and constructive comments on earlier drafts of this paper.


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Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.GREQAM, School of EconomicsAix-Marseille UniversityMarseilleFrance
  2. 2.Adam Smith Business SchoolUniversity of GlasgowGlasgowUK

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