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Consumption and Real Exchange Rates in Professional Forecasts

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Author Info
Michael B. Devereux () (University of British Columbia, CEPR, and NBER)
Gregor W. Smith () (Queen's University)
James Yetman () (Bank for International Settlements)

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Abstract

Standard models of international risk sharing with complete asset markets predict a positive association between relative consumption growth and real exchange-rate depreciations 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 explain the evidence.

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File URL: http://www.econ.queensu.ca/working_papers/papers/qed_wp_1195.pdf
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File Function: First version 2009
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Publisher Info
Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1195.

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Length: 43 pages
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:qed:wpaper:1195

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Related research
Keywords: international risk-sharing; Backus-Smith puzzle;

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Find related papers by JEL classification:
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation
F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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. [Downloadable!] (restricted)
  2. Hess, Gregory & Shin, Kwanho, 2006. "Understanding the Backus-Smith Puzzle: It’s the (Nominal) Exchange Rate, Stupid," MPRA Paper 696, University Library of Munich, Germany. [Downloadable!]
  3. Motohiro Yogo, 2004. "Estimating the Elasticity of Intertemporal Substitution When Instruments Are Weak," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 797-810, 03. [Downloadable!] (restricted)
  4. Chari, V V & Kehoe, Patrick J & McGrattan, Ellen R, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Blackwell Publishing, vol. 69(3), pages 533-63, July.
    Other versions:
  5. Campbell, John Y & Mankiw, N Gregory, 1990. "Permanent Income, Current Income, and Consumption," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(3), pages 265-79, July.
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  6. Allen Head & Todd Mattina & Gregor Smith, 2004. "Real exchange rates, preferences, and incomplete markets: evidence, 1961-2001," Canadian Journal of Economics, Canadian Economics Association, vol. 37(3), pages 782-801, August. [Downloadable!] (restricted)
  7. Martin Bodenstein, 2005. "International Asset Markets and Real Exchange Rate Volatility," 2005 Meeting Papers 352, Society for Economic Dynamics. [Downloadable!]
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  8. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2008. "International Risk Sharing and the Transmission of Productivity Shocks," Review of Economic Studies, Blackwell Publishing, vol. 75(2), pages 443-473, 04. [Downloadable!] (restricted)
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  9. Metodij Hadzi-Vaskov, 2008. "Does the Nominal Exchange Rate Explain the Backus-Smith Puzzle? Evidence from the Eurozone," Working Papers 07-32, Utrecht School of Economics. [Downloadable!]
  10. Jorge Selaive & Vicente Tuesta, 2003. "Net foreign assets and imperfect pass-through: the consumption real exchange rate anomaly," International Finance Discussion Papers 764, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  11. Narayana R. Kocherlakota & Luigi Pistaferri, 2007. "Household Heterogeneity and Real Exchange Rates," Economic Journal, Royal Economic Society, vol. 117(519), pages C1-C25, 03. [Downloadable!] (restricted)
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  12. Neely, Christopher J & Roy, Amlan & Whiteman, Charles H, 2001. "Risk Aversion versus Intertemporal Substitution: A Case Study of Identification Failure in the Intertemporal Consumption Capital Asset Pricing Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(4), pages 395-403, October.
  13. Benigno, Gianluca & Thoenissen, Christoph, 2008. "Consumption and real exchange rates with incomplete markets and non-traded goods," Journal of International Money and Finance, Elsevier, vol. 27(6), pages 926-948, October. [Downloadable!] (restricted)
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  14. James H. Stock & Jonathan Wright, 2000. "GMM with Weak Identification," Econometrica, Econometric Society, vol. 68(5), pages 1055-1096, September.
  15. Luis Opazo, 2006. "The Backus-Smith Puzzle: The Role of Expectations," Working Papers Central Bank of Chile 395, Central Bank of Chile. [Downloadable!]
  16. Maurice Obstfeld, 1994. "Are Industrial-Country Consumption Risks Globally Diversified?," NBER Working Papers 4308, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  17. Kollmann, Robert, 1995. "Consumption, real exchange rates and the structure of international asset markets," Journal of International Money and Finance, Elsevier, vol. 14(2), pages 191-211, April. [Downloadable!] (restricted)
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  18. Akito Matsumoto & Robert P. Flood & Nancy P. Marion, 2009. "International Risk Sharing During the Globalization Era," IMF Working Papers 09/209, International Monetary Fund. [Downloadable!]
  19. Gregor W. Smith & James Yetman, 2007. "The Curse of Irving Fisher (Professional Forecasters' Version)," Working Papers 1144, Queen's University, Department of Economics. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jonas Dovern & Ulrich Fritsche & Jiri Slacalek, 2009. "Disagreement among Forecasters in G7 Countries," Macroeconomics and Finance Series 200906, Hamburg University, Department Wirtschaft und Politik. [Downloadable!]
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