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Consumption and Real Exchange Rates in Professional Forecasts

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  • Michael B. Devereux

    ()
    (University of British Columbia, CEPR, and NBER)

  • Gregor W. Smith

    ()
    (Queen's University)

  • James Yetman

    ()
    (Bank for International Settlements)

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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Bibliographic 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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Keywords: international risk-sharing; Backus-Smith puzzle;

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Citations

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Cited by:
  1. Kollmann, Robert, 2009. "Limited Asset Market Participation and the Consumption-Real Exchange Rate Anomaly," CEPR Discussion Papers 7452, C.E.P.R. Discussion Papers.
  2. 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 174, Federal Reserve Bank of Dallas.
  3. 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.
  4. Lo Prete, Anna, 2013. "Sharing Risk Within and Across Countries: The Role of Labor Market Institutions," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201328, University of Turin.
  5. 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.
  6. Hamano, Masashige, 2013. "The consumption-real exchange rate anomaly with extensive margins," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 26-46.
  7. 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.
  8. Dovern, Jonas & Fritsche, Ulrich & Slacalek, Jiri, 2009. "Disagreement among forecasters in G7 countries," Working Paper Series 1082, European Central Bank.
  9. Giancarlo Corsetti & Luca Dedola & Francesca Viani, 2012. "The international risk-sharing puzzle is at business-cycle and lower frequency," Banco de Espa�a Working Papers 1212, Banco de Espa�a.
  10. Matthew Canzoneri & Robert Cumby & Behzad Diba, 2013. "Addressing International Empirical Puzzles: the Liquidity of Bonds," Open Economies Review, Springer, vol. 24(2), pages 197-215, April.
  11. Michael B. Devereux & Gregor W. Smith & James Yetman, 2009. "Consumption and Real Exchange Rates in Professional Forecasts," Working Papers 1195, Queen's University, Department of Economics.
  12. Gregory H. Bauer & Antonio Diez de los Rios, 2012. "An International Dynamic Term Structure Model with Economic Restrictions and Unspanned Risks," Working Papers 12-5, Bank of Canada.

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