716 - External Wealth and the Trade Balance: A Time-Series Analysis for the Netherlands

Wetenschappelijke publicatie
Date 1 December 2002

This paper investigates the effect of the external wealth position of the Netherlands on the Dutch trade balance. Contrary to intuition which allows net creditors to run a trade deficit, the Netherlands has over a period of years be running trade surpluses. To explain this paradox, not unique to the Dutch case, we use the model applied by Lane and Milesi-Ferretti to evaluate the role of a differential between rates of return on foreign assets and foreign liabilities. The results of our time-series analysis suggest that the effect of external wealth becomes more negative as foreign assets become relatively more lucrative. In addition, negative valuation changes of Dutch net external wealth due to an increase in the value of foreign liabilities during the nineties, can explain the trade balance. Finally, a comparison with Denmark shows an equivalent influence of the rates of return in the way wealth affects the trade balance. Key words: Net foreign assets, trade balance, rate of return differential JEL codes: F21, F32