IDEAS home Printed from https://ideas.repec.org/a/wly/canjec/v37y2004i3p782-801.html
   My bibliography  Save this article

Real exchange rates, preferences, and incomplete markets: evidence, 1961–2001

Author

Listed:
  • Allen C. Head
  • Todd D. Mattina
  • Gregor W. Smith

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. JEL classification: F41 Taux de change réels, préférences et marchés incomplets : résultats 1961–2001. Plusieurs modéles macroéconomiques internationaux lient le taux de change réel à un ratio des utilités marginales. On examine ce lien empiriquement, en permettant à l’utilité marginale de la consommation de dépendre des dépenses du gouvernement, des encaisses monétaires réelles, ou des habitudes données. On considére aussi deux environnements avec des marchés incomplets pour les actifs: l’un avec des marchés exogènes manquants mais un taux d’escompte endogène qui ancre bien la répartition des revenus, et l’autre avec des marchés segmentés endogènes. Bien que ni l’un ni l’autre ne satisfasse les impératifs théoriques et les restrictions sur‐identifiées pour chaque pays, l’utilité, avec les persistances d’habitudes externes, engendre l’ajustement le meilleur avec les taux de change réels des pays de l’OCDE entre 1961 et 2001.

Suggested Citation

  • Allen C. Head & Todd D. Mattina & Gregor W. Smith, 2004. "Real exchange rates, preferences, and incomplete markets: evidence, 1961–2001," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 37(3), pages 782-801, August.
  • Handle: RePEc:wly:canjec:v:37:y:2004:i:3:p:782-801
    DOI: 10.1111/j.0008-4085.2004.00248.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.0008-4085.2004.00248.x
    Download Restriction: no

    File URL: https://libkey.io/10.1111/j.0008-4085.2004.00248.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412, National Bureau of Economic Research, Inc.
    2. Kollmann, Robert, 1995. "Consumption, real exchange rates and the structure of international asset markets," Journal of International Money and Finance, Elsevier, vol. 14(2), pages 191-211, April.
    3. Abel, Andrew B, 1990. "Asset Prices under Habit Formation and Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 80(2), pages 38-42, May.
    4. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
    5. Devereux, Michael B. & Gregory, Allan W. & Smith, Gregor W., 1992. "Realistic cross-country consumption correlations in a two-country, equilibrium, business cycle model," Journal of International Money and Finance, Elsevier, vol. 11(1), pages 3-16, February.
    6. Correia, Isabel & Neves, Joao C. & Rebelo, Sergio, 1995. "Business cycles in a small open economy," European Economic Review, Elsevier, vol. 39(6), pages 1089-1113, June.
    7. Hercowitz, Zvi & Sampson, Michael, 1991. "Output Growth, the Real Wage, and Employment Fluctuations," American Economic Review, American Economic Association, vol. 81(5), pages 1215-1237, December.
    8. Fernando Alvarez & Andrew Atkeson & Patrick J. Kehoe, 2002. "Money, Interest Rates, and Exchange Rates with Endogenously Segmented Markets," Journal of Political Economy, University of Chicago Press, vol. 110(1), pages 73-112, February.
    9. Backus, David K. & Smith, Gregor W., 1993. "Consumption and real exchange rates in dynamic economies with non-traded goods," Journal of International Economics, Elsevier, vol. 35(3-4), pages 297-316, November.
    10. V. V Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 533-563.
    11. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
    12. Lucas, Robert Jr. & Stokey, Nancy L., 1984. "Optimal growth with many consumers," Journal of Economic Theory, Elsevier, vol. 32(1), pages 139-171, February.
    13. Duarte, Margarida & Stockman, Alan C., 2005. "Rational speculation and exchange rates," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 3-29, January.
    14. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-417, June.
    15. Ravn, Morten, 2001. "Consumption Dynamics and Real Exchange Rate," CEPR Discussion Papers 2940, C.E.P.R. Discussion Papers.
    16. Abel, Andrew B., 1999. "Risk premia and term premia in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 3-33, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pavlidis, Efthymios G. & Paya, Ivan & Peel, David A., 2015. "Testing for linear and nonlinear Granger causality in the real exchange rate–consumption relation," Economics Letters, Elsevier, vol. 132(C), pages 13-17.
    2. Jorge Selaive & Vicente Tuesta, 2003. "Net foreign assets and imperfect pass-through: the consumption real exchange rate anomaly," International Finance Discussion Papers 764, Board of Governors of the Federal Reserve System (U.S.).
    3. Charles Engel & John H Rogers, 2009. "Expected Consumption Growth from Cross-Country Surveys: Implications for Assessing International Capital Markets," IMF Staff Papers, Palgrave Macmillan, vol. 56(3), pages 543-573, August.
    4. Devereux, Michael B. & Smith, Gregor W. & Yetman, James, 2012. "Consumption and real exchange rates in professional forecasts," Journal of International Economics, Elsevier, vol. 86(1), pages 33-42.
    5. Jorge Selaive & Vicente Tuesta, 2003. "Net Foreign Assets And Imperfect Financial Integration: An Empirical Approach," Working Papers Central Bank of Chile 252, Central Bank of Chile.
    6. 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.
    7. 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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tihomir Janjicek, 2008. "Exchange Rate Movements From 1961 To 2001," Economic Thought and Practice, Department of Economics and Business, University of Dubrovnik, vol. 17(2), pages 157-176, december.
    2. Ghironi, Fabio, 2008. "The role of net foreign assets in a New Keynesian small open economy model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(6), pages 1780-1811, June.
    3. Christoph Thoenissen & Gianluca Benigno, 2004. "On the consumption real exchange rate anomaly," 2004 Meeting Papers 533, Society for Economic Dynamics.
    4. Enrique Martinez-Garcia, 2007. "A monetary model of the exchange rate with informational frictions," Globalization Institute Working Papers 02, Federal Reserve Bank of Dallas.
    5. Marc‐André Letendre, 2004. "Capital utilization and habit formation in a small open economy model," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 37(3), pages 721-741, August.
    6. 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.
    7. Hamano, Masashige, 2013. "The consumption-real exchange rate anomaly with extensive margins," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 26-46.
    8. Robert Kollmann, 2019. "Explaining International Business Cycle Synchronization: Recursive Preferences and the Terms of Trade Channel," Open Economies Review, Springer, vol. 30(1), pages 65-85, February.
    9. Giancarlo Corsetti & Luca Dedola & Francesca Viani, 2012. "The international risk sharing puzzle is at business cycle and lower frequency," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 45(2), pages 448-471, May.
    10. Jorge Selaive & Vicente Tuesta, 2003. "Net foreign assets and imperfect pass-through: the consumption real exchange rate anomaly," International Finance Discussion Papers 764, Board of Governors of the Federal Reserve System (U.S.).
    11. 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.
    12. Giancarlo Corsetti & Luca Dedola & Francesca Viani, 2012. "Traded and Nontraded Goods Prices, and International Risk Sharing: An Empirical Investigation," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 8(1), pages 403-466.
    13. Maggiori, Matteo, 2021. "International Macroeconomics With Imperfect Financial Markets," SocArXiv z8g6r, Center for Open Science.
    14. Sutherland, Alan & Küçük, Hande, 2015. "International Risk Sharing and Portfolio Choice with Non-separable Preferences," CEPR Discussion Papers 10724, C.E.P.R. Discussion Papers.
    15. Emmanuel Farhi & Xavier Gabaix, "undated". "Rare Disasters and Exchange Rates," Working Paper 71001, Harvard University OpenScholar.
    16. Benigno, Gianluca & Thoenissen, Christoph, 2008. "Consumption and real exchange rates with incomplete markets and non-traded goods," Journal of International Money and Finance, Elsevier, vol. 27(6), pages 926-948, October.
    17. Rouillard, Jean-François, 2018. "International risk sharing and financial shocks," Journal of International Money and Finance, Elsevier, vol. 82(C), pages 26-44.
    18. Jorge Selaive & Vicente Tuesta, 2003. "Net Foreign Assets And Imperfect Financial Integration: An Empirical Approach," Working Papers Central Bank of Chile 252, Central Bank of Chile.
    19. Mukherjee, Rahul, 2015. "Institutions, Corporate Governance and Capital Flows," Journal of International Economics, Elsevier, vol. 96(2), pages 338-359.
    20. Thepthida Sopraseuth & Jean-Olivier Hairault, 2008. "Fluctuations internationales et dynamique du taux de change," Économie et Prévision, Programme National Persée, vol. 183(2), pages 65-91.

    More about this item

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:canjec:v:37:y:2004:i:3:p:782-801. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1111/(ISSN)1540-5982 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.