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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. Kocherlakota, Narayana & Pistaferri, Luigi, 2005. "Asset Pricing Implications of Pareto Optimality with Private Information," CEPR Discussion Papers 4930, C.E.P.R. Discussion Papers.
  2. 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.
  3. Narayana R. Kocherlakota & Luigi Pistaferri, 2006. "Household heterogeneity and real exchange rates," Staff Report 372, Federal Reserve Bank of Minneapolis.
  4. 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.
  5. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
  6. 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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Cited by:
  1. 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.
  2. Atanas Christev & Jacques Melitz, 2011. "EMU, EU, Market Integration and Consumption Smoothing," Working Papers 2011-21, CEPII research center.
  3. Christev, Atanas & Mélitz, Jacques, 2010. "EMU, EU, capital market integration and consumption smoothing," CEPR Discussion Papers 7776, C.E.P.R. Discussion Papers.
  4. 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.
  5. Le, Vo Phuong Mai & Minford, Patrick & Wickens, Michael R., 2009. "The 'Puzzles' Methodology: en route to Indirect Inference?," CEPR Discussion Papers 7539, C.E.P.R. Discussion Papers.
  6. 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.
  7. Basu, Parantap & Semenov, Andrei & Wada, Kenji, 2009. "Uninsurable Risk and Financial Market Puzzles," MPRA Paper 23351, University Library of Munich, Germany.

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