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Consumption and real exchange rates with incomplete markets and non-traded goods

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  • Benigno, Gianluca
  • Thoenissen, Christoph

Abstract

This paper addresses the consumption-real exchange rate anomaly. International real business cycle models based on complete financial markets predict a unitary correlation between the real exchange rate and the ratio of home to foreign consumption when subjected to supply-side shocks. In the data, this correlation is usually small and often negative. This paper shows that this anomaly can be successfully addressed by models that have an incomplete financial market structure and a non-traded as well as traded goods production sector.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 27 (2008)
Issue (Month): 6 (October)
Pages: 926-948

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Handle: RePEc:eee:jimfin:v:27:y:2008:i:6:p:926-948

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Web page: http://www.elsevier.com/locate/inca/30443

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  1. Gianluca Benigno & Christoph Thoenissen, 2003. "Equilibrium Exchange Rates and Supply-Side Performance," Economic Journal, Royal Economic Society, vol. 113(486), pages C103-C124, March.
  2. Ngai, Liwa Rachel & Pissarides, Christopher, 2005. "Trends in Hours and Economic Growth," CEPR Discussion Papers 5440, C.E.P.R. Discussion Papers.
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  8. Kollmann, Robert, 1995. "Consumption, real exchange rates and the structure of international asset markets," Journal of International Money and Finance, Elsevier, vol. 14(2), pages 191-211, April.
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  17. V. V Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 533-563.
  18. Rachel L. Ngai, 2007. "An R&D-based Model of Multi-sector Growth," 2007 Meeting Papers 349, Society for Economic Dynamics.
  19. King, Robert G & Watson, Mark W, 1998. "The Solution of Singular Linear Difference Systems under Rational Expectations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 1015-26, November.
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