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Consumption home bias and exchange rate behavior

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  • Cooke, Dudley
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    Abstract

    This paper studies the response of the nominal exchange rate to monetary shocks in an economy with consumption home bias (CHB). When wages are sticky monetary shocks produce exchange rate dynamics. A liquidity effect and a net foreign asset effect determine the extent of these dynamics. I demonstrate that the exchange rate dynamics generated through these two channels are greater the more consumption is biased towards locally produced goods. I also show the influence of consumption home bias is stronger (weaker) when monetary shocks result in a negative (positive) net foreign asset position.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Macroeconomics.

    Volume (Year): 32 (2010)
    Issue (Month): 1 (March)
    Pages: 415-425

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    Handle: RePEc:eee:jmacro:v:32:y:2010:i:1:p:415-425

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    Web page: http://www.elsevier.com/locate/inca/622617

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    Keywords: Consumption home bias Exchange rate Monetary shocks;

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    Cited by:
    1. Gehrke, Britta & Yao, Fang, 2013. "Sources of Real Exchange Rate Fluctuations: The Role of Supply Shocks Revisited," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79821, Verein für Socialpolitik / German Economic Association.

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