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On the consumption real exchange rate anomaly

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
Year of publication:
2004
Authors: Thoenissen, Christoph ; Benigno, Gianluca
Institutions: Society for Economic Dynamics - SED
Subject: consumption-real exchange rate anomaly
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Type of publication: Book / Working Paper
Notes:
The text is part of a series Society for Economic Dynamics 2004 Number 533
Classification: F41 - Open Economy Macroeconomics
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Persistent link: https://www.econbiz.de/10005069505
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