We examine the link between the net foreign asset position, the trade balance and the real exchange rate. In particular, we decompose the impact of a country’s net foreign asset position (‘external wealth’) on its long-run real exchange rate into two mechanisms: the relation between...

This paper studies sharp reductions in current account deficits and large exchange rate depreciations in low- and middle-income countries. It examines which factors help predict the occurrence of a reversal or a currency crisis, and how these events affect macroeconomic performance. It finds...

In mid-2008, the real effective exchange rate of the dollar was close to its minimum level for the past 4 decades. At the same time, however, the U.S. trade and current account deficits remain large and, absent a significant correction in coming years, would contribute to a further accumulation...

This Paper documents four basic facts about investment goods and investment prices. First, investment has a very significant non-tradable component in the form of construction services. Second, distributions services (wholesaling, retailing, and transportation) are much less important for...

A number of developing countries have run large and persistent current account deficits in both the late-1970s/early-1980s and in the early-1990s, raising the issue of whether these persistent imbalances are sustainable. This paper puts forward a notion of current account sustainability and...

There is a well-known set of empirical regularities that describe the experience of countries that peg their exchange rate as part of a macroeconomic adjustment programme. Following-the-peg economies tend to experience an increase in GDP, a large expansion of production in the non-tradable...