Exchange Rate Volatility and Consumption Home-Bias

Dudley Cooke
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Dudley Cooke: University of Warwick

No 49, Royal Economic Society Annual Conference 2003 from Royal Economic Society

Abstract: This paper develops a stylised small open economy model with a closed form solution to study the behaviour of the exchange rate. Exchange rate volatility is a feature of the model when there is home-bias in consumption. In particular, when money demand is not responsive to changes in consumption the exchange rate overshoots in response to an increase in the money supply. Our results suggest that consumption home-bias is an important feature which should be incorporated into the modern approach to international finance.

Keywords: small open economy; consumption home-bias; exchange rate overshooting (search for similar items in EconPapers)
JEL-codes: E52 F41 (search for similar items in EconPapers)
Date: 2003-06-04
New Economics Papers: this item is included in nep-fin and nep-ifn
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Persistent link: https://EconPapers.repec.org/RePEc:ecj:ac2003:49

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