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Dynamics of Real Exchange Rates and Trade Balance In The Presence of Heterogeneous Preferences and Incomplete Financial Markets

Author

Listed:
  • Geun Mee Ahn

    (Kangwon University)

  • Young-jae Kim

    (Pusan National University)

Abstract

When agents across countries have home-biased preferences in a world of incomplete financial markets, an increase in the relative price of home-produced goods resulted from a permanent adverse home output shock makes the cost of living of home agents higher than that of foreign agents, reducing home relative consumption. Intertemporal utility maximizng agents with the degree of relative risk aversion greater than unity in the CES utility function would like to smooth their relative consumption by reducing exports and increasing imports, resulting in trade deficit.

Suggested Citation

  • Geun Mee Ahn & Young-jae Kim, 2005. "Dynamics of Real Exchange Rates and Trade Balance In The Presence of Heterogeneous Preferences and Incomplete Financial Markets," Korean Economic Review, Korean Economic Association, vol. 21, pages 213-235.
    • Handle: RePEc:kea:keappr:ker-20051231-21-2-04
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    More about this item

    Keywords

    heterogeneous preferences; incomplete financial markets; relative cost of living; real exchange rates; relative consumption; trade balance;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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