The consumption-real exchange rate anomaly: nontraded goods and distribution services

Vicente Tuesta

Applied Economics, 2013, vol. 45, issue 2, 255-271

Abstract: In the data, Real Exchange Rates (RERs) tend to move in opposite directions with respect to the relative consumption across countries. Chari et al . (2002) refer to the inability of models to replicate the previous stylized fact as the consumption-RER anomaly. In this article, it is shown that an International Real Business Cycle (IRBC) model, similar to the one proposed by Chari et al . but extended by considering nontraded goods and an incomplete asset market structure, can solve the anomaly. Nontradable goods amplify wealth effects arising from the incomplete assets market structure, generating a negative co-movement between the RER and relative consumption. Adding Distribution Services (DS) improves the performance of the model in some other dimensions. In particular, DS help to generate countercyclical net exports.

Date: 2013
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DOI: 10.1080/00036846.2011.597730

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