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Real Interest Rates, Real Exchange Rates, and Net Foreign Assets in the Adjustment Process
Author:
Mr. Thomas Helbling
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Mr. Bart Turtelboom null

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Series:
IMF Working Papers
Volume/Issue:
Volume 1995: Issue 129
Language:
English
Publication Date:
01 Dec 1995
DOI:
https://doi.org/10.5089/9781451934731.001
ISBN:
9781451934731
ISSN:
1018-5941
Pages:
38
Keywords:
WP; exchange rate; trade balance; real interest rate; time series; output series; adjustment mechanism; goods market; consumption smoothing; nontradable goods; equilibrium price; exchange rate correlation; standard deviation; traded goods; consumption-GDP correlation; United States trade balance; Real exchange rates; Foreign assets; Real interest rates; Consumption; Foreign currency exposure
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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This paper analyzes the recent behavior of real exchange rates, the trade balance and the net foreign asset position of the United States in an intertemporal optimizing model of the world economy that incorporates heterogeneity across countries and imperfect international capital and good markets. While the model successfully tracks the dynamics of trade balances and net foreign assets it generates too much consumption smoothing and excessively volatile relative prices. Resolving these inadequacies simultaneously is difficult as the elasticity of substitution between tradables and nontradables affects in opposite ways the degree of consumption smoothing and the volatility of relative prices.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund