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Consumption and Real Exchange Rates in Professional Forecasts

  • Michael B. Devereux


    (University of British Columbia, CEPR, and NBER)

  • Gregor W. Smith


    (Queen's University)

  • James Yetman


    (Bank for International Settlements)

Standard models of international risk sharing with complete asset markets predict a positive association between relative consumption growth and real exchange-rate depreciations 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 explain the evidence.

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Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1195.

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Length: 43 pages
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:qed:wpaper:1195
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