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Real exchange rates, preferences, and incomplete markets: evidence, 1961-2001

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Author Info
Allen Head
Todd Mattina
Gregor Smith

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Abstract

Many international macroeconomic models link the real exchange rate to a ratio of marginal utilities. We examine this link empirically, allowing the marginal utility of consumption to depend on government expenditure, real money balances, or external habit. We also consider two environments with incomplete asset markets; one with exogenously missing markets but an endogenous discount rate that anchors the distribution of wealth and one with endogenous market segmentation. Although none of these satisfies theoretical and over-identifying restrictions for every country, utility with external habit persistence provides the best match with real exchange rates for OECD countries between 1961 and 2001.

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File URL: http://economics.ca/cgi/xms?jab=v37n3/13.pdf
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Publisher Info
Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 37 (2004)
Issue (Month): 3 (August)
Pages: 782-801
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Handle: RePEc:cje:issued:v:37:y:2004:i:3:p:782-801

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Find related papers by JEL classification:
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

Cited by:
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  1. Charles Engel & John H. Rogers, 2008. "Expected consumption growth from cross-country surveys: implications for assessing international capital markets," International Finance Discussion Papers 949, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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This page was last updated on 2009-11-25.

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