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Consumption and Real Exchange Rates in Dynamic Economies with Non-Traded Goods

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Author Info

  • David K. Backus

    ()
    (New York University)

  • Gregor W. Smith

    ()
    (Queen's University)

Abstract

We examine the possibility that nontraded goods may account for several striking features of international macroeconomic data: large, persistent deviations from purchasing power parity, small correlations of aggregate consumption fluctuations across countries, and substantial international real interest rate differentials. A dynamic, exchange economy is used to show that nontraded goods in principle can account for each of these phenomena. In the theory there is a close relation between fluctuations in consumption ratios and those in bilateral real exchange rates, but we find little evidence for this relation in time series data for eight OECD countries.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1252.pdf
File Function: First version 1993
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Bibliographic Info

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1252.

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Length: 25 pages
Date of creation: Jan 1993
Date of revision:
Publication status: forthcoming in the Journal of International Economics
Handle: RePEc:qed:wpaper:1252

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Keywords: consumption correlations; purchasing power parity; real exchange rates;

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