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Household Heterogeneity and the Real Exchange Rate: Still a Puzzle

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  • Kollmann, Robert

Abstract

Kocherlakota and Pistaferri (EJ, 2007) [KP] develop a model of a world economy with private-information Pareto optimal (PIPO) risk sharing; in that model, the real exchange rate tracks relative domestic/foreign cross-sectional distributions of consumption. KP claim that the PIPO model fits the UK/US real exchange rate well. This paper shows that the PIPO model is inconsistent with the UK/US data. Minor specification changes overturn KP’s regression results. I also document that the relevant (relative) cross-sectional consumption moment is orders of magnitude more volatile than the real exchange rate, and less persistent. The link between the real exchange rage and consumption (heterogeneity) remains a puzzle.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7301.

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Date of creation: May 2009
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Handle: RePEc:cpr:ceprdp:7301

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Keywords: heterogeneity; International risk sharing; real exchange rate;

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References

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  1. Narayana R. Kocherlakota & Luigi Pistaferri, 2006. "Household heterogeneity and real exchange rates," Staff Report 372, Federal Reserve Bank of Minneapolis.
  2. Kollmann, R., 1992. "Consumption, Real Exchange Rates and the Structure of International Asset Markets," Cahiers de recherche 9232, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  3. Kocherlakota, Narayana R. & Pistaferri, Luigi, 2005. "Asset pricing implications of Pareto optimality with private information," Discussion Paper Series 1: Economic Studies 2005,29, Deutsche Bundesbank, Research Centre.
  4. Narayana Kocherlakota & Luigi Pistaferri, 2008. "Inequality and Real Exchange Rates," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 597-608, 04-05.
  5. David K. Backus & Gregor W. Smith, 1993. "Consumption and Real Exchange Rates in Dynamic Economies with Non-Traded Goods," Working Papers 1252, Queen's University, Department of Economics.
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Cited by:
  1. Vo Phuong Mai Le & Patrick Minford & Michael Wickens, 2009. " The ‘Puzzles’ Methodology: En Route to Indirect Inference?," CDMA Conference Paper Series 0903, Centre for Dynamic Macroeconomic Analysis.
  2. Atanas CHRISTEV & Jacques MELITZ, 2010. "EMU, EU, Capital Market Integration and Consumption Smoothing," Working Papers 2010-06, Centre de Recherche en Economie et Statistique.
  3. Atanas Christev & Jacques Melitz, 2011. "EMU, EU, Market Integration and Consumption Smoothing," Working Papers 2011-21, CEPII research center.
  4. Basu, Parantap & Semenov, Andrei & Wada, Kenji, 2011. "Uninsurable risk and financial market puzzles," Journal of International Money and Finance, Elsevier, vol. 30(6), pages 1055-1089, October.
  5. Le, Vo Phuong Mai & Minford, Patrick & Wickens, Michael R., 2010. "Some Problems in the Testing of DSGE Models," CEPR Discussion Papers 7621, C.E.P.R. Discussion Papers.
  6. Basu, Parantap & Semenov, Andrei & Wada, Kenji, 2009. "Uninsurable Risk and Financial Market Puzzles," MPRA Paper 23351, University Library of Munich, Germany.
  7. 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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