On the consumption-real exchange rate anomaly

Gianluca Benigno and Christoph Thoenissen

Bank of England working papers from Bank of England

Abstract: This paper addresses the consumption-real exchange rate anomaly. International real business cycle models based on complete financial markets predict a unitary correlation between the real exchange rate and the ratio of home to foreign consumption when subjected to supply-side shocks. In the data, this correlation is usually small and often negative. This paper shows that this anomaly can be successfully addressed by models that have an incomplete financial market structure and a non-traded as well as traded goods production sector.

Date: 2005-03
New Economics Papers: this item is included in nep-dge and nep-ifn
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Related works:
Working Paper: The consumption-real exchange rate anomaly (2004)
Working Paper: On the consumption real exchange rate anomaly (2004)
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