The Relationship Of Real Exchange Rate, Net Foreign Asset And Terms Of Trade

As a classic question in the international econom、ics, transfer problem includes the discussion of the relationship between international payment and terms of trade, which also leads to the discussion of real exchange rate and international transfer. Most of the classic theories agreed that net foreign assets (NFA) and terms of trade (TOT) have a significant effect on the determination of the real equilibrium exchange rate.We use a one-period, two-country model to discuss the transfer problem-if the preference for domestic goods exists, the terms of trade of the transfer-payer will deteriorate, while the terms of trade of the receiver will improve. We continue to invent an inter-temporal equilibrium model, which takes international credit and changes of NFA into consideration. The non-traded goods market is cleared in this equilibrium model, and rational agents invest and consume according to the intertemporal optimization choice. We find that the price of non-traded goods could be the’middle’variable, which connects terms of trade, NFA and tradable output with the real exchange rate, thus giving us the determination equation of real equilibrium exchange rate.We regress the real exchange model using panel data of 20 industrial countries and 12 developing countries, which could show whether all the explanatory variables are effective or not in the determination of real exchange rate. The regression reveals that the productivity of traded goods has a significant positive impact on the real exchange rate, which means that Balassa-Samuelson Hypothesis should be considered when determining real exchange rate. Terms of trade, openness and technology development also have a positive impact; although change of NFA and transfer payment don’t have a straight significant impact on exchange rate, the volatility of NFA could affect terms of trade, thus affect the real exchange rate.For any countries, higher productivity of traded goods leads to domestic real appreciation. In the long run, industrial countries should lay more emphasis on the development of technology and the improvement of terms of trade. While developing countries should promote trade liberalization, increase traded productivity and advocate industrial revolution, all of which will appreciate the real exchange rate.