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

  • Benigno, Gianluca
  • Thoenissen, Christoph

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 addressed by models that have an incomplete financial market structure and a non-traded as well as traded goods production sector.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5580.

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Date of creation: Mar 2006
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Handle: RePEc:cpr:ceprdp:5580
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  17. King, Robert G & Watson, Mark W, 1998. "The Solution of Singular Linear Difference Systems under Rational Expectations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 1015-26, November.
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  19. Kollmann, Robert, 2005. "Macroeconomic effects of nominal exchange rate regimes: new insights into the role of price dynamics," Journal of International Money and Finance, Elsevier, vol. 24(2), pages 275-292, March.
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