Limited asset market participation and the consumption-real exchange rate anomaly

Robert Kollmann ()

No 41, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

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.

JEL-codes: F36 F41 F47 G15 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2010
New Economics Papers: this item is included in nep-cba, nep-dge and nep-ifn
Note: Published as: Kollmann, Robert (2012), "Limited Asset Market Participation and the Consumption-Real Exchange Rate Anomaly," Canadian Journal of Economics 45 (2): 556-584.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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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 (2009)
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