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Backus–Smith puzzle and the European Union: It’s not just the nominal exchange rate

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  • Predrag Petroviæ

    (Institute of Social Sciences, Belgrade, Republic of Serbia.)

Abstract

The goal of our research is testing of presence and background examination of Backus–Smith puzzle in the EU. The research is based on the technique of econometric analysis of panel data, i.e. on the estimation of one-way/two-way error component models and models without effects. The results of the research have shown that: (a) there is serious evidence on presence of the Backus–Smith puzzle in the EU, (b) its background comprises both nominal exchange rate and inflation differential, and (c) empirical data rejects complete risk sharing assumption strongly and decisively, but this does not explain the Backus–Smith puzzle. The basic conclusion of our research is that nominal exchange rate movements are not the only source of Backus–Smith puzzle in the EU, as is the case in OECD members states.

Suggested Citation

  • Predrag Petroviæ, 2016. "Backus–Smith puzzle and the European Union: It’s not just the nominal exchange rate," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 34(2), pages 393-418.
    • Handle: RePEc:rfe:zbefri:v:34:y:2016:i:2:p:393-418
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    More about this item

    Keywords

    Backus–Smith puzzle; real exchange rate; complete risk sharing; incomplete risk sharing;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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