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Real Exchange Rates, Preferences, and Incomplete Markets: Evidence, 1961-2001

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Author Info

  • Allen C. Head

    ()
    (Queen's University)

  • Todd D. Mattina

    ()
    (Queen's University)

  • Gregor W. Smith

    ()
    (International Monetary Fund)

Abstract

Many international macroeconomic models link the real exchange rate to a ratio of marginal utilities. We examine this link empirically, allowing the marginal utility of consumption to depend on government expenditure, real money balances, or external habit. We also consider two environments with incomplete asset markets; one with exogenously missing markets but an endogenous discount rate that anchors the distribution of wealth and one with endogenous market segmentation. Although none of these satisfies theoretical and over-identifying restrictions for every country, utility with external habit persistence provides the best match with real exchange rates for OECD countries between 1961 and 2001.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1246.pdf
File Function: First version 2004
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Bibliographic Info

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1246.

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Length: 25 pages
Date of creation: Jan 2004
Date of revision:
Publication status: Forthcoming in the Canadian Journal of Economics
Handle: RePEc:qed:wpaper:1246

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Keywords: real exchange rate; consumption; marginal utility;

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Cited by:
  1. Jorge Selaive & Vicente Tuesta, 2003. "Net foreign assets and imperfect pass-through: the consumption real exchange rate anomaly," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 764, Board of Governors of the Federal Reserve System (U.S.).
  2. Michael B. Devereux & Gregor W. Smith & James Yetman, 2009. "Consumption and Real Exchange Rates in Professional Forecasts," Working Papers, Queen's University, Department of Economics 1195, Queen's University, Department of Economics.
  3. Charles Engel & John H. Rogers, 2008. "Expected consumption growth from cross-country surveys: implications for assessing international capital markets," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 949, Board of Governors of the Federal Reserve System (U.S.).
  4. Efthymios Pavlidis & Ivan Paya & David Peel, 2010. "Further empirical evidence on the consumption-real exchange rate anomaly," Working Papers 447022, Lancaster University Management School, Economics Department.
  5. Jorge Selaive & Vicente Tuesta, 2003. "Net Foreign Assets And Imperfect Financial Integration: An Empirical Approach," Working Papers Central Bank of Chile, Central Bank of Chile 252, Central Bank of Chile.

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