Consumption and Real Exchange Rates in Professional Forecasts

Michael Devereux, Gregor Smith and James Yetman

No 14795, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Standard models of international risk sharing with complete asset markets predict a positive association between relative consumption growth and real exchange-rate depreciation 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 resolve the anomaly.

JEL-codes: F37 F41 F47 (search for similar items in EconPapers)
Date: 2009-03
New Economics Papers: this item is included in nep-cba, nep-for and nep-opm
Note: IFM
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Citations: View citations in EconPapers (16)

Published as Devereux, Michael B. & Smith, Gregor W. & Yetman, James, 2012. "Consumption and real exchange rates in professional forecasts," Journal of International Economics, Elsevier, vol. 86(1), pages 33-42.

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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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