LONG-RUN DETERMINANTS OF THE REAL EXCHANGE-RATE - A STOCK-FLOW PERSPECTIVE

This paper examines the long-run determinants of the real exchange rat e from a stock-flow perspective. The empirical analysis estimates a lo ng-run relationship between the real exchange rate, net foreign assets , and other factors affecting trade flows. Using postwar data for the United Stares and Japan, cointegration analysis supports the finding t hat the structural factors underlying each country's net trade and net foreign asset positions determine the long-run path for the real valu e of the dollar and the yen. The empirical analysis also provides esti mates for the underlying stochastic trend in each real exchange rate s eries.