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Exchange Rate Volatility and Consumption Home-Bias

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Author Info
Cooke, Dudley (University of Warwick)
Abstract

This paper develops a stylised small open economy model with a closed form solution to study the behaviour of the exchange rate. Exchange rate volatility is a feature of the model when there is home-bias in consumption. In particular, when money demand is not responsive to changes in consumption the exchange rate overshoots in response to an increase in the money supply. Our results suggest that consumption home-bias is an important feature which should be incorporated into the modern approach to international finance.

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File URL: http://repec.org/res2003/Cooke.pdf
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Publisher Info
Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2003 with number 49.

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Date of creation: 04 Jun 2003
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Handle: RePEc:ecj:ac2003:49

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Web page: http://www.res.org.uk/society/annualconf.asp
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Related research
Keywords: small open economy; consumption home-bias; exchange rate overshooting;

Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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