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The Consumption-Real Exchange Rate Anomaly: Non-Traded Goods, Incomplete Markets and Distribution Services

  • Jorge Selaive
  • Vicente Tuesta

The real exchange rate is volatile and tends to move in opposite direction with respect to relative consumption across countries. Chari, Kehoe and McGrattan (CKM, 2002) refer to the inability of models to replicate the last stylized fact as the consumption-real exchange rate anomaly. In this paper we show that an international RBC model similar to the one proposed by CKM but extended by considering nontraded goods and an incomplete asset market structure can solve this anomaly. Non tradable goods amplify wealth effects that arise from the incomplete assets market structure generating a negative comovement between the real exchange rate and relative consumption. The model performs reasonable well with other business cycle moments and, by adding distribution services in terms of nontraded goods, it generates a real exchange rate as volatile as in the data. Results are robust to the addition of nominal price rigidities and -in contrast with CKM- there is no need of monetary shocks to account for the real exchange rate dynamics.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 359.

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Date of creation: Apr 2006
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Handle: RePEc:chb:bcchwp:359
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  1. Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, vol. 85(1), pages 168-85, March.
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  8. Clarida, Richard & Galí, Jordi & Gertler, Mark, 2002. "A Simple Framework for International Monetary Policy Analysis," CEPR Discussion Papers 3355, C.E.P.R. Discussion Papers.
  9. Irving B. Kravis & Robert E. Lipsey, 1986. "The Assessment of National Price Levels," NBER Working Papers 1912, National Bureau of Economic Research, Inc.
  10. Kollmann, Robert, 2002. "Monetary Policy Rules in the Open Economy: Effects on Welfare and Business Cycles," CEPR Discussion Papers 3279, C.E.P.R. Discussion Papers.
  11. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
  12. Benigno, Pierpaolo, 2001. "Price Stability with Imperfect Financial Integration," CEPR Discussion Papers 2854, C.E.P.R. Discussion Papers.
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