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On the consumption-real exchange rate anomaly

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  • Gianluca Benigno
  • Christoph Thoenissen

Abstract

This paper addresses the consumption-real exchange rate anomaly. International real business cycle models based on complete financial markets predict a unitary correlation between the real exchange rate and the ratio of home to foreign consumption when subjected to supply-side shocks. In the data, this correlation is usually small and often negative. This paper shows that this anomaly can be successfully addressed by models that have an incomplete financial market structure and a non-traded as well as traded goods production sector.

Suggested Citation

  • Gianluca Benigno & Christoph Thoenissen, 2005. "On the consumption-real exchange rate anomaly," Bank of England working papers 254, Bank of England.
    • Handle: RePEc:boe:boeewp:254
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    File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2005/WP254.pdf
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    Cited by:

    1. Fabio Ghironi & Marc J. Melitz, 2005. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 120(3), pages 865-915.
    2. Christoph Thoenissen, 2004. "Real exchange rates, current accounts and the net foreign asset position," Money Macro and Finance (MMF) Research Group Conference 2004 71, Money Macro and Finance Research Group.
    3. Aydan Dogan, 2014. "Euro- US Real Exchange Rate Dynamics: How Far Can We Push Equilibrium Models?," Studies in Economics 1409, School of Economics, University of Kent.
    4. Abayomi OREDEGBE & Isaac FADEYIBI, 2009. "Diversification into Farm Tourism," EcoMod2009 21500073, EcoMod.
    5. Fernando Lorenzo & Rosa Osimani & Patricio Valenzuela, 2005. "The Elasticity of Substitution in Demand for Non-Tradable Goods in Uruguay," Research Department Publications 3171, Inter-American Development Bank, Research Department.
    6. Fernando Lorenzo & Rosa Osimani & Patricio Valenzuela, 2005. "Elasticidad de la sustitución en la demanda de bienes no transables en Uruguay," Research Department Publications 3172, Inter-American Development Bank, Research Department.
    7. M. Hadzi-Vaskov, 2007. "Does the Nominal Exchange Rate Explain the Backus-Smith Puzzle? Evidence from the Eurozone," Working Papers 07-32, Utrecht School of Economics.

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    JEL classification:

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

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