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Exchange Rate Volatility and Consumption Home-Bias

Author

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  • 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.

Suggested Citation

  • Cooke, Dudley, 2003. "Exchange Rate Volatility and Consumption Home-Bias," Royal Economic Society Annual Conference 2003 49, Royal Economic Society.
    • Handle: RePEc:ecj:ac2003:49
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    More about this item

    Keywords

    small open economy; consumption home-bias; exchange rate overshooting;
    All these keywords.

    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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