Limited Asset Market Participation and the Consumption-Real Exchange Rate Anomaly

Robert Kollmann ()

No 7452, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Under efficient consumption risk sharing, as assumed in standard international business cycle models, a country?s aggregate consumption rises relative to foreign consumption, when the country?s real exchange rate depreciates. Yet, empirically, relative consumption and the real exchange rate are essentially uncorrelated. I show that this ?consumption-real exchange rate anomaly? can be explained by a simple model in which a subset of households trade in complete financial markets, while the remaining households lead hand-to-mouth (HTM) lives. HTM behavior also generates greater volatility of the real exchange rate and of net exports, which likewise brings the model closer to the data.

Keywords: Consumption; Hand to mouth consumers; Limited asset market participation; Real exchange rate (search for similar items in EconPapers)
JEL-codes: F36 F41 (search for similar items in EconPapers)
Date: 2009-09
New Economics Papers: this item is included in nep-cba, nep-dge and nep-opm
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Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Limited asset market participation and the consumption-real exchange rate anomaly (2012)
Journal Article: Limited asset market participation and the consumption‐real exchange rate anomaly (2012)
Working Paper: Limited asset market participation and the consumption-real exchange rate anomaly (2010)
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