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Real exchange rates and international co-movement: News-shocks and non-tradable goods with complete markets

Author

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  • Kyriacos Lambrias

    (European Central Bank)

Abstract
We propose a fully flexible, complete-market model of the international business cycle that is consistent with a negative correlation between the real exchange rate and relative consumption (the Backus-Smith puzzle). We allow for imperfect substitutability of capital which significantly reinforces Harrold-Balassa-Samuelson effects, producing more empirically relevant movements in real exchange rates. Most importantly, we introduce changes in expectations (news-shocks) as an explanation to the Backus-Smith puzzle, through shifts in relative demand. However, news-shocks also contribute to lower cross-country correlations of economic aggregates, deteriorating international co-movement. (Copyright: Elsevier)

Suggested Citation

  • Kyriacos Lambrias, 2020. "Real exchange rates and international co-movement: News-shocks and non-tradable goods with complete markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 154-169, January.
    • Handle: RePEc:red:issued:18-211
    DOI: 10.1016/j.red.2019.06.001
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    Cited by:

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    3. Kyriacos Lambrias, 2020. "Real exchange rates and international co-movement: News-shocks and non-tradable goods with complete markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 154-169, January.
    4. Curatola, Giuliano & Dergunov, Ilya, 2023. "International capital markets with interdependent preferences: Theory and empirical evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 403-421.
    5. Stijn Claessens & M. Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: A survey," CAMA Working Papers 2017-76, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    6. Kyriacos Lambrias, 2020. "Real exchange rates and international co-movement: News-shocks and non-tradable goods with complete markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 154-169, January.

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    More about this item

    Keywords

    Backus-Smith puzzle; Real-exchange rates; News-driven cycles;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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