Consumption and real exchange rates in professional forecasts

Michael Devereux, Gregor Smith and James Yetman

No 295, BIS Working Papers from Bank for International Settlements

Abstract: 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.

Keywords: international risk sharing; Backus-Smith puzzle (search for similar items in EconPapers)
Pages: 47 pages
Date: 2009-12
New Economics Papers: this item is included in nep-cba, nep-for, nep-ifn and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Related works:
Journal Article: Consumption and real exchange rates in professional forecasts (2012)
Working Paper: Consumption and Real Exchange Rates in Professional Forecasts (2009)
Working Paper: Consumption And Real Exchange Rates In Professional Forecasts (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:295

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