Private Consumption, Nontraded Goods and Real Exchange Rate: A Cointegration_Euler Equation Approach
AbstractThis paper presents an empirical study of real exchange rate movements from a consumer's perspective. Trade between two countries creates a link between real exchange rate and terms of trade. It is the private consumption of non-traded goods that induces an equilibrium relationship between real exchange rate and private consumption of traded and non-traded goods. We use Ogaki and Park's (1989) cointegration-Euler equation approach to explore long-run implications from the equilibrium relationship. Given the stationary preference shocks assumption, the testable restriction is that real exchange rate and private consumption of traded and non-traded goods in the home and foreign countries are cointegrated. The empirical evidence suggests that private consumption in the home and foreign countries accounts for a significant fraction of the long run movements of real exchange rate in South Korea and Taiwan. Accounting for real government consumption does not overturn the result.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5731.
Date of creation: Aug 1996
Date of revision:
Publication status: published as Kenneth S. Lin. "Private Consumption, Nontraded Goods, and Real Exchange Rate: Evidence from South Korea and Taiwan," in Takatoshi Ito and Anne O. Krueger, editors, "Changes in Exchange Rates in Rapidly Developing Countries: Theory, Practice, and Policy Issues (NBER-EASE volume 7)" University of Chicago Press (1999)
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