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Consumption and real exchange rates in professional forecasts

  • Devereux, Michael B.
  • Smith, Gregor W.
  • Yetman, James

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 1990–2010 we find no such association, whether for floating nominal exchange rate regimes, fixed exchange rates, or common currencies, thus deepening the puzzle.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 86 (2012)
Issue (Month): 1 ()
Pages: 33-42

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Handle: RePEc:eee:inecon:v:86:y:2012:i:1:p:33-42
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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