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Consumption and Real Exchange Rates in Dynamic Economies with Non-Traded Goods

Author

Listed:
  • David K. Backus

    () (New York University)

  • Gregor W. Smith

    () (Queen's University)

Abstract

We examine the possibility that nontraded goods may account for several striking features of international macroeconomic data: large, persistent deviations from purchasing power parity, small correlations of aggregate consumption fluctuations across countries, and substantial international real interest rate differentials. A dynamic, exchange economy is used to show that nontraded goods in principle can account for each of these phenomena. In the theory there is a close relation between fluctuations in consumption ratios and those in bilateral real exchange rates, but we find little evidence for this relation in time series data for eight OECD countries.

Suggested Citation

  • David K. Backus & Gregor W. Smith, 1993. "Consumption and Real Exchange Rates in Dynamic Economies with Non-Traded Goods," Working Papers 1252, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:1252
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    File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1252.pdf
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    Keywords

    consumption correlations; purchasing power parity; real exchange rates;

    JEL classification:

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

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