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Household Heterogeneity and the Real Exchange Rate: Still a Puzzle

Robert Kollmann ()

No 7301, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Kocherlakota and Pistaferri (EJ, 2007) [KP] develop a model of a world economy with private-information Pareto optimal (PIPO) risk sharing; in that model, the real exchange rate tracks relative domestic/foreign cross-sectional distributions of consumption. KP claim that the PIPO model fits the UK/US real exchange rate well. This paper shows that the PIPO model is inconsistent with the UK/US data. Minor specification changes overturn KP’s regression results. I also document that the relevant (relative) cross-sectional consumption moment is orders of magnitude more volatile than the real exchange rate, and less persistent. The link between the real exchange rage and consumption (heterogeneity) remains a puzzle.

Keywords: heterogeneity; International risk sharing; real exchange rate (search for similar items in EconPapers)
JEL-codes: F36 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-opm
Date: 2009-05
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