Keeping up with the Joneses and exchange rate volatility in a Redux model

Ming-Jen Chang, Juin-jen Chang and Jhy-yuan Shieh

International Review of Economics & Finance, 2014, vol. 29, issue C, 569-584

Abstract: By incorporating a keeping-up-with-the-Joneses preference into the Redux model, this paper sketches the implications of consumption externalities for the short-run and long-run equilibria. We show that the size of the consumption externality plays a crucial role in terms of affecting the long-run and short-run effects of important economic variables. Keeping-up-with-the-Joneses in relation to domestic benchmark consumption has the effect of magnifying the impact of monetary shocks on the exchange rate. Besides, simple numerical analyses show that the exchange rate volatility is raised (reduced) by an increasing rate as the size of the externality in regard to domestic (foreign) consumption increases.

Keywords: Consumption externality; Exchange rate volatility; Keeping up with the Joneses (search for similar items in EconPapers)
JEL-codes: E21 F31 F41 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:29:y:2014:i:c:p:569-584

DOI: 10.1016/j.iref.2013.08.004

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