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Understanding the Real Exchange Rate and Consumption: Limited Asset Market Participation

Yongseung Jung
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Yongseung Jung: Kyung Hee University

Korean Economic Review, 2017, vol. 33, 127-152

Abstract: This paper sets up an open-economy new Keynesian model with limited asset market participation and expenditure delays to explore the real exchange rate and consumption anomaly. The main finding of the paper is that relative aggregate consumption move less closely with the real exchange rate defined as the marginal utility of consumption in foreign country relative to the marginal utility of consumption in home country when only some households with expenditure delays can protect themselves from risk by participating in the financial market and the rest of the households consume their current wage income. The correlation between the real exchange rate and relative consumption turns into a negative territory when households are less willing to substitute home goods with foreign goods.

Keywords: Expenditure Delays; Non-Asset Holders; Real Exchange Rate-Consumption Anomaly (search for similar items in EconPapers)
JEL-codes: E52 F31 (search for similar items in EconPapers)
Date: 2017
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