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On the consumption real exchange rate anomaly

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  • Christoph Thoenissen
  • Gianluca Benigno

Abstract

This paper addresses the Backus-Smith puzzle regarding the absence of a link between the real exchange rate and relative consumption, in a simple dynamic general equilibrium open economy model. Following Backus and Smith (1993), we show that a very simple form of market incompleteness combined with wealth effects is sufficient in generating the observed cross-correlation. A key role is played by investment dynamics and the steady-state net foreign asset position

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 533.

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Date of creation: 2004
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Handle: RePEc:red:sed004:533

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Keywords: consumption-real exchange rate anomaly;

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References

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  1. Gianluca Benigno & Christoph Thoenissen, 2002. "Equilibrium exchange rates and supply-side performance," Bank of England working papers 156, Bank of England.
  2. Backus, David K. & Smith, Gregor W., 1993. "Consumption and real exchange rates in dynamic economies with non-traded goods," Journal of International Economics, Elsevier, Elsevier, vol. 35(3-4), pages 297-316, November.
  3. Pierpaolo Benigno, 2009. "Price Stability with Imperfect Financial Integration," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 41(s1), pages 121-149, 02.
  4. V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can sticky price models generate volatile and persistent real exchange rates?," Staff Report, Federal Reserve Bank of Minneapolis 277, Federal Reserve Bank of Minneapolis.
  5. Fabio Ghironi & Marc J. Melitz, 2005. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 120(3), pages 865-915, August.
  6. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, American Economic Association, vol. 81(4), pages 797-818, September.
  7. Charles Engel, 1995. "Accounting for U.S. Real Exchange Rate Changes," NBER Working Papers 5394, National Bureau of Economic Research, Inc.
  8. Alan C. Stockman & Linda L. Tesar, 1990. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," NBER Working Papers 3566, National Bureau of Economic Research, Inc.
  9. Ravn, Morten O., 2001. "Consumption Dynamics and Real Exchange Rate," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2940, C.E.P.R. Discussion Papers.
  10. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2008. "International Risk Sharing and the Transmission of Productivity Shocks," Review of Economic Studies, Oxford University Press, vol. 75(2), pages 443-473.
  11. Schmitt-Grohé, Stephanie & Uribe, Martín, 2002. "Closing Small Open Economy Models," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3096, C.E.P.R. Discussion Papers.
  12. Kollmann, R., 1992. "Consumption, Real Exchange Rates and the Structure of International Asset Markets," Cahiers de recherche, Centre interuniversitaire de recherche en économie quantitative, CIREQ 9232, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  13. King, Robert G & Watson, Mark W, 1998. "The Solution of Singular Linear Difference Systems under Rational Expectations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 1015-26, November.
  14. Vicente Tuesta & Jorge Selaive, 2004. "Net Foreing Assets and Imperfect Pass-through: The Consumption-Real Exchange Rate Anomaly," 2004 Meeting Papers, Society for Economic Dynamics 203, Society for Economic Dynamics.
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Cited by:
  1. Fabio Ghironi & Marc J. Melitz, 2004. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," NBER Working Papers 10540, National Bureau of Economic Research, Inc.
  2. Christoph Thoenissen, 2004. "Real exchange rates, current accounts and the net foreign asset position," Money Macro and Finance (MMF) Research Group Conference 2004, Money Macro and Finance Research Group 71, Money Macro and Finance Research Group.
  3. Fernando Lorenzo & Rosa Osimani & Patricio Valenzuela, 2005. "Elasticidad de la sustitución en la demanda de bienes no transables en Uruguay," Research Department Publications, Inter-American Development Bank, Research Department 3172, Inter-American Development Bank, Research Department.
  4. M. Hadzi-Vaskov, 2008. "Does the nominal exchange rate explain the Backus-Smith puzzle? evidence from the Eurozone," Working Papers, Utrecht School of Economics 07-32, Utrecht School of Economics.
  5. Fernando Lorenzo & Rosa Osimani & Patricio Valenzuela, 2005. "The Elasticity of Substitution in Demand for Non-Tradable Goods in Uruguay," Research Department Publications, Inter-American Development Bank, Research Department 3171, Inter-American Development Bank, Research Department.

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