On the consumption real exchange rate anomaly

Christoph Thoenissen and Gianluca Benigno

No 533, 2004 Meeting Papers from Society for Economic Dynamics

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

Keywords: consumption-real; exchange; rate; anomaly (search for similar items in EconPapers)
JEL-codes: F41 (search for similar items in EconPapers)
Date: 2004
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Related works:
Working Paper: On the consumption-real exchange rate anomaly (2005)
Working Paper: The consumption-real exchange rate anomaly (2004)
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