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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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  19. Benigno, Gianluca & Christoph Thoenissen, 2002. "Equilibrium Exchange Rates and Supply Side Performance," Royal Economic Society Annual Conference 2002 19, Royal Economic Society.
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