Real exchange rates and international co-movement: news-shocks and non-tradable goods with complete markets

Kyriacos Lambrias ()

No 1946, Working Paper Series from European Central Bank

Abstract: We propose a fully flexible, complete-market model of the international business cycle that is consistent with two major empirical facts: positive cross-country co-movement of economic aggregates and a negative correlation between the real exchange rate and relative consumption (the Backus-Smith puzzle). The novelty of our paper is twofold. First, we allow for imperfect substitutability of capital which significantly reinforces Harrold-Balassa-Samuelson effects, producing more empirically relevant movements in real exchange rates. Second, we introduce changes in expectations (news-shocks) as an explanation to the Backus-Smith puzzle through movements in relative hours across countries, while being consistent with expectations-driven economic expansions. JEL Classification: F41, F44

Keywords: Backus-Smith Puzzle; news-driven cycles; real-exchange rates (search for similar items in EconPapers)
Date: 2016-08
New Economics Papers: this item is included in nep-dge and nep-opm
Note: 2586295
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Real exchange rates and international co-movement: News-shocks and non-tradable goods with complete markets (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20161946

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