Limited asset market participation and the consumption-real exchange rate anomaly
Robert Kollmann ()
No 41, Globalization and Monetary Policy Institute Working Paper from Federal Reserve Bank of Dallas
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.
JEL-codes: F36 F41 F47 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge and nep-ifn
Note: Published as: Kollmann, Robert (2012), "Limited Asset Market Participation and the Consumption-Real Exchange Rate Anomaly," Canadian Journal of Economics 45 (2): 556-584.
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Journal Article: Limited asset market participation and the consumption-real exchange rate anomaly (2012)
Working Paper: Limited Asset Market Participation and the Consumption-Real Exchange Rate Anomaly (2009)
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