Precautionary risks for an open economy

Alex Ferreira and Paulo Matos

International Review of Economics & Finance, 2020, vol. 70, issue C, 154-167

Abstract: Our empirical investigation reveals that the variance of foreign consumption is much higher than the variance of domestic consumption growth for the domestic United States of America (US) resident. We show that precautionary savings in foreign currency arise because of this volatility differential between domestic and imported consumption growth. These open economy stochastic discount factors are later shown to be strongly positively correlated with the US business cycle. We present evidence that the precautionary currency risk must be seen through the lens of an open economy model rather than the traditional durable/non-durable closed economy separation.

Keywords: Risk; Exchange rate; Consumption; Imports (search for similar items in EconPapers)
JEL-codes: E44 F31 F36 G12 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:70:y:2020:i:c:p:154-167

DOI: 10.1016/j.iref.2020.06.034

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