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On the consumption-real exchange rate anomaly

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Gianluca Benigno
Christoph Thoenissen

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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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Paper provided by Bank of England in its series Bank of England working papers with number 254.

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Handle: RePEc:boe:boeewp:254

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Backus, David K. & Smith, Gregor W., 1993. "Consumption and real exchange rates in dynamic economies with non-traded goods," Journal of International Economics, Elsevier, vol. 35(3-4), pages 297-316, November. [Downloadable!] (restricted)
  2. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September. [Downloadable!] (restricted)
  3. 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.
  4. Chari, V V & Kehoe, Patrick J & McGrattan, Ellen R, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Blackwell Publishing, vol. 69(3), pages 533-63, July.
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  5. Charles Engel, 1999. "Accounting for U.S. Real Exchange Rate Changes," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 507-538, June. [Downloadable!] (restricted)
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  6. Corsetti, Giancarlo & Dedola, Luca & Leduc, Sylvain, 2004. "International Risk Sharing and the Transmission of Productivity Shocks," CEPR Discussion Papers 4746, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Alan C. Stockman & Linda L. Tesar, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," NBER Working Papers 3566, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Gianluca Benigno & Christoph Thoenissen, . "Equilibrium exchange rates and supply-side performance," Bank of England working papers 156, Bank of England. [Downloadable!]
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  9. Ravn, Morten O., 2001. "Consumption Dynamics and Real Exchange Rate," CEPR Discussion Papers 2940, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  10. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October. [Downloadable!] (restricted)
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  11. Kollmann, R., 1992. "Consumption, Real Exchange Rates and the Structure of International Asset Markets," Cahiers de recherche 9232, Universite de Montreal, Departement de sciences economiques.
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  12. Fabio Ghironi & Marc J. Melitz, 2004. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," NBER Working Papers 10540, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Jorge Selaive & Vicente Tuesta, 2003. "Net foreign assets and imperfect pass-through: the consumption real exchange rate anomaly," International Finance Discussion Papers 764, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  14. Benigno, Pierpaolo, 2001. "Price Stability with Imperfect Financial Integration," CEPR Discussion Papers 2854, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Fernando Lorenzo & Rosa Osimani & Patricio Valenzuela, 2005. "Elasticidad de la sustitución en la demanda de bienes no transables en Uruguay," RES Working Papers 3172, Inter-American Development Bank, Research Department. [Downloadable!]
  2. Metodij Hadzi-Vaskov, 2008. "Does the Nominal Exchange Rate Explain the Backus-Smith Puzzle? Evidence from the Eurozone," Working Papers 07-32, Utrecht School of Economics. [Downloadable!]
  3. Christoph Thoenissen, 2004. "Real exchange rates, current accounts and the net foreign asset position," Money Macro and Finance (MMF) Research Group Conference 2004 71, Money Macro and Finance Research Group. [Downloadable!]
  4. Fabio Ghironi & Marc J. Melitz, 2004. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," NBER Working Papers 10540, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Fernando Lorenzo & Rosa Osimani & Patricio Valenzuela, 2005. "The Elasticity of Substitution in Demand for Non-Tradable Goods in Uruguay," RES Working Papers 3171, Inter-American Development Bank, Research Department. [Downloadable!]
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