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Consumption and real exchange rates in professional forecasts

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  • Michael B Devereux
  • Gregor W Smith
  • James Yetman

Abstract

Standard models of international risk sharing with complete asset markets predict a positive association between relative consumption growth and real exchange-rate depreciations across countries. The striking lack of evidence for this link - the consumption/real-exchange-rate anomaly or Backus-Smith puzzle - has prompted research on risk-sharing indicators with incomplete asset markets. That research generally implies that the association holds in forecasts, rather than realizations. Using professional forecasts for 28 countries for 1990-2008 we find no such association, thus deepening the puzzle. Independent evidence on the weak link between forecasts for consumption and real interest rates suggests that the presence of 'hand-to-mouth' consumers may help to explain the evidence.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 295.

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Length: 47 pages
Date of creation: Dec 2009
Date of revision:
Handle: RePEc:bis:biswps:295

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Keywords: international risk sharing; Backus-Smith puzzle;

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Citations

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Cited by:
  1. Matthew Canzoneri & Robert Cumby & Behzad Diba, 2013. "Addressing International Empirical Puzzles: the Liquidity of Bonds," Open Economies Review, Springer, Springer, vol. 24(2), pages 197-215, April.
  2. Devereux, Michael B. & Smith, Gregor W. & Yetman, James, 2012. "Consumption and real exchange rates in professional forecasts," Journal of International Economics, Elsevier, Elsevier, vol. 86(1), pages 33-42.
  3. Hamano, Masashige, 2013. "The consumption-real exchange rate anomaly with extensive margins," Journal of International Money and Finance, Elsevier, Elsevier, vol. 36(C), pages 26-46.
  4. Yu-chin Chen & Kwok Ping Tsang & Wen Jen Tsay, 2010. "Home Bias in Currency Forecasts," Working Papers 272010, Hong Kong Institute for Monetary Research.
  5. Jonas Dovern & Ulrich Fritsche & Jiri Slacalek, 2009. "Disagreement among Forecasters in G7 Countries," Macroeconomics and Finance Series, Hamburg University, Department Wirtschaft und Politik 200906, Hamburg University, Department Wirtschaft und Politik.
  6. Corsetti, Giancarlo & Dedola, Luca & Viani, Francesca, 2011. "The International Risk-Sharing Puzzle is at Business Cycle and Lower Frequency," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8355, C.E.P.R. Discussion Papers.
  7. Jinill Kim & Seth Pruitt, 2013. "Estimating Monetary Policy Rules When Nominal Interest Rates Are Stuck at Zero," CAMA Working Papers 2013-53, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  8. Michael B. Devereux & Viktoria Hnatkovska, 2011. "Consumption Risk-Sharing and the Real Exchange Rate: Why does the Nominal Exchange Rate Make Such a Difference?," NBER Working Papers 17288, National Bureau of Economic Research, Inc.
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  10. Davis, J. Scott & Presno, Ignacio, 2014. "Inflation targeting and the anchoring of inflation expectations: cross-country evidence from consensus forecasts," Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas 174, Federal Reserve Bank of Dallas.
  11. Lo Prete, Anna, 2013. "Sharing Risk Within and Across Countries: The Role of Labor Market Institutions," Department of Economics and Statistics Cognetti de Martiis. Working Papers, University of Turin 201328, University of Turin.
  12. Gregory H. Bauer & Antonio Diez de los Rios, 2012. "An International Dynamic Term Structure Model with Economic Restrictions and Unspanned Risks," Working Papers, Bank of Canada 12-5, Bank of Canada.

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