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Consumption and Real Exchange Rates in Professional Forecasts

  • Michael B. Devereux
  • Gregor W. Smith
  • James Yetman

Standard models of international risk sharing with complete asset markets predict a positive association between relative consumption growth and real exchange-rate depreciation across countries. The striking lack of evidence for this link the consumption/real-exchange-rate anomaly or Backus-Smith puzzle - has prompted research on risk-sharing indicators with incomplete asset markets. That research generally implies that the association holds in forecasts, rather than realizations. Using professional forecasts for 28 countries for 1990-2008 we find no such association, thus deepening the puzzle. Independent evidence on the weak link between forecasts for consumption and real interest rates suggests that the presence of 'hand-to-mouth' consumers may help to resolve the anomaly.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14795.

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Date of creation: Mar 2009
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Publication status: published as Devereux, Michael B. & Smith, Gregor W. & Yetman, James, 2012. "Consumption and real exchange rates in professional forecasts," Journal of International Economics, Elsevier, vol. 86(1), pages 33-42.
Handle: RePEc:nbr:nberwo:14795
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