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The consumption-real exchange rate anomaly

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  • Christoph Thoenissen
  • Gianluca Benigno

Abstract

This paper addresses the Backus-Smith puzzle regarding the absence of a link between the real exchange rate and relative consumption, in a simple dynamic general equilibrium open economy model. Following Backus and Smith (1993), we show that a very simple form of market incompleteness combined with wealth effects is sufficient in generating the observed cross-correlation. A key role is played by investment dynamics and the steady-state net foreign asset position
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Suggested Citation

  • Christoph Thoenissen & Gianluca Benigno, 2004. "The consumption-real exchange rate anomaly," Money Macro and Finance (MMF) Research Group Conference 2003 102, Money Macro and Finance Research Group.
    • Handle: RePEc:mmf:mmfc03:102
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    Cited by:

    1. 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.
    2. Fabio Ghironi & Marc J. Melitz, 2005. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(3), pages 865-915.
    3. 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.
    4. Abayomi OREDEGBE & Isaac FADEYIBI, 2009. "Diversification into Farm Tourism," EcoMod2009 21500073, EcoMod.
    5. 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.
    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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    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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