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Consumption and Real Exchange Rates with Incomplete Markets and Non-Traded Goods

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  • Gianluca Benigno
  • Christoph Theonissen

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 Theonissen, 2006. "Consumption and Real Exchange Rates with Incomplete Markets and Non-Traded Goods," CEP Discussion Papers dp0771, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp0771
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    References listed on IDEAS

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    More about this item

    Keywords

    Consumption-real exchange rate anomaly; incomplete financial markets; nontraded goods;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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