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Limited Asset Market Participation and the Consumption-Real Exchange Rate Anomaly

Robert Kollmann ()

No 7452, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Under efficient consumption risk sharing, as assumed in standard international business cycle models, a country’s aggregate consumption rises relative to foreign consumption, when the country’s real exchange rate depreciates. Yet, empirically, relative consumption and the real exchange rate are essentially uncorrelated. I show that this ‘consumption-real exchange rate anomaly’ can be explained by a simple model in which a subset of households trade in complete financial markets, while the remaining households lead hand-to-mouth (HTM) lives. HTM behavior also generates greater volatility of the real exchange rate and of net exports, which likewise brings the model closer to the data.

Keywords: consumption; hand to mouth consumers; limited asset market participation; 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-dge and nep-opm
Date: 2009-09
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Journal Article: Limited asset market participation and the consumption-real exchange rate anomaly (2012) Downloads
Working Paper: Limited asset market participation and the consumption-real exchange rate anomaly (2010) Downloads
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