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The Consumption-Real Exchange Rate Anomaly: Non-Traded Goods, Incomplete Markets and Distribution Services

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Author Info
Jorge Selaive
Vicente Tuesta

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Abstract

The real exchange rate is volatile and tends to move in opposite direction with respect to relative consumption across countries. Chari, Kehoe and McGrattan (CKM, 2002) refer to the inability of models to replicate the last stylized fact as the consumption-real exchange rate anomaly. In this paper we show that an international RBC model similar to the one proposed by CKM but extended by considering nontraded goods and an incomplete asset market structure can solve this anomaly. Non tradable goods amplify wealth effects that arise from the incomplete assets market structure generating a negative comovement between the real exchange rate and relative consumption. The model performs reasonable well with other business cycle moments and, by adding distribution services in terms of nontraded goods, it generates a real exchange rate as volatile as in the data. Results are robust to the addition of nominal price rigidities and -in contrast with CKM- there is no need of monetary shocks to account for the real exchange rate dynamics.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 359.

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Date of creation: Apr 2006
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Handle: RePEc:chb:bcchwp:359

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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)
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  3. Alejandro Justiniano & Bruce Preston, 2006. "Can Structural Small Open Economy Models Account for the Influence of Foreign Disturbances?," 2006 Meeting Papers 479, Society for Economic Dynamics. [Downloadable!]
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  4. Philip R. Lane & Gian Maria Milesi-Ferretti, 2004. "The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 841-857, 02. [Downloadable!] (restricted)
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  5. Ariel Burstein & Martin Eichenbaum & Sergio Rebelo, 2005. "Large Devaluations and the Real Exchange Rate," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 742-784, August.
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  6. Gianluca Benigno & Pierpaolo Benigno, 2003. "Price Stability in Open Economies," Review of Economic Studies, Blackwell Publishing, vol. 70(4), pages 743-764, October. [Downloadable!] (restricted)
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  8. Caroline M. Betts & Timothy J. Kehoe, 2004. "U.S. real exchange rate fluctuations and relative price fluctuations," Staff Report 334, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  11. 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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  12. Corsetti, Giancarlo & Dedola, Luca, 2003. "Macroeconomics of International Price Discrimination," CEPR Discussion Papers 3710, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  13. Benigno, Gianluca & Thoenissen, Christoph, 2006. "Consumption and Real Exchange Rates with Incomplete Markets and Non-Traded Goods," CEPR Discussion Papers 5580, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  14. 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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  15. Richard Clarida & Jordi Gali & Mark Gertler, 2002. "A Simple Framework for International Monetary Policy Analysis," NBER Working Papers 8870, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  19. 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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  22. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1991. "International real business cycles," Staff Report 146, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  23. Patrick J. Kehoe & Fabrizio Perri, 2002. "International Business Cycles with Endogenous Incomplete Markets," Econometrica, Econometric Society, vol. 70(3), pages 907-928, May. [Downloadable!] (restricted)
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  24. Kollmann, Robert, 2002. "Monetary Policy Rules in the Open Economy: Effects on Welfare and Business Cycles," CEPR Discussion Papers 3279, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  25. Philip Lane & Gian Maria Milesi-Ferretti, 2001. "Long-Term Capital Movements," CEG Working Papers 20018, Trinity College Dublin, Department of Economics. [Downloadable!]
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  26. 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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  27. Jorge Selaive & Vicente Tuesta, 2003. "Net Foreign Assets And Imperfect Financial Integration: An Empirical Approach," Working Papers Central Bank of Chile 252, Central Bank of Chile. [Downloadable!]
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  28. 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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  29. 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. Plasmans J. & Fornero J. & Michalak T., 2006. "A microfounded sectoral model for open economies," Working Papers 2007013, University of Antwerp, Faculty of Applied Economics. [Downloadable!]
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