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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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