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Consumption and Real Exchange Rates in Professional Forecasts

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  • Michael B. Devereux
  • Gregor W. Smith
  • James Yetman

Abstract

Standard models of international risk sharing with complete asset markets predict a positive association between relative consumption growth and real exchange-rate depreciation across countries. The striking lack of evidence for this link the consumption/real-exchange-rate anomaly or Backus-Smith puzzle - has prompted research on risk-sharing indicators with incomplete asset markets. That research generally implies that the association holds in forecasts, rather than realizations. Using professional forecasts for 28 countries for 1990-2008 we find no such association, thus deepening the puzzle. Independent evidence on the weak link between forecasts for consumption and real interest rates suggests that the presence of 'hand-to-mouth' consumers may help to resolve the anomaly.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14795.

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Date of creation: Mar 2009
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Publication status: published as Devereux, Michael B. & Smith, Gregor W. & Yetman, James, 2012. "Consumption and real exchange rates in professional forecasts," Journal of International Economics, Elsevier, vol. 86(1), pages 33-42.
Handle: RePEc:nbr:nberwo:14795

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Citations

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Cited by:
  1. Giancarlo Corsetti & Luca Dedola & Francesca Viani, 2011. "The International Risk-Sharing Puzzle is at Business Cycle and Lower Frequency," Economics Working Papers, European University Institute ECO2011/16, European University Institute.
  2. Matthew Canzoneri & Robert Cumby & Behzad Diba, 2013. "Addressing International Empirical Puzzles: the Liquidity of Bonds," Open Economies Review, Springer, Springer, vol. 24(2), pages 197-215, April.
  3. Jinill Kim & Seth Pruitt, 2013. "Estimating Monetary Policy Rules When Nominal Interest Rates Are Stuck at Zero," CAMA Working Papers 2013-53, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  4. Robert Kollmann, 2010. "Limited asset market participation and the consumption-real exchange rate anomaly," Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas 41, Federal Reserve Bank of Dallas.
  5. Michael B. Devereux & Gregor W. Smith & James Yetman, 2009. "Consumption and Real Exchange Rates in Professional Forecasts," NBER Working Papers 14795, National Bureau of Economic Research, Inc.
  6. Dovern, Jonas & Fritsche, Ulrich & Slacalek, Jiri, 2009. "Disagreement among forecasters in G7 countries," Working Paper Series, European Central Bank 1082, European Central Bank.
  7. Gregory H. Bauer & Antonio Diez de los Rios, 2012. "An International Dynamic Term Structure Model with Economic Restrictions and Unspanned Risks," Working Papers, Bank of Canada 12-5, Bank of Canada.
  8. Lo Prete, Anna, 2013. "Sharing risk within and across countries: the role of labor market institutions," Economic Systems, Elsevier, Elsevier, vol. 37(3), pages 449-461.
  9. Yu-chin Chen & Kwok Ping Tsang & Wen Jen Tsay, 2010. "Home Bias in Currency Forecasts," Working Papers e07-18, Virginia Polytechnic Institute and State University, Department of Economics.
  10. Davis, J. Scott & Presno, Ignacio, 2014. "Inflation targeting and the anchoring of inflation expectations: cross-country evidence from consensus forecasts," Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas 174, Federal Reserve Bank of Dallas.
  11. Hamano, Masashige, 2013. "The consumption-real exchange rate anomaly with extensive margins," Journal of International Money and Finance, Elsevier, Elsevier, vol. 36(C), pages 26-46.
  12. 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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