Further empirical evidence on the consumption-real exchange rate anomaly

Efthymios Pavlidis, Ivan Paya () and David Peel

No 447022, Working Papers from Lancaster University Management School, Economics Department

Abstract: This paper adopts a nonlinear framework to model the deviations of the real exchange rate from its fundamental value implied by International Real Business Cycle models with complete asset markets. By focusing on the post Bretton Woods era, we find that in several cases there is a long run relationship between real exchange rates and consumption series in line with international risk sharing. Further, linearity tests indicate that the majority of the deviation processes exhibit significant smooth transition nonlinearity. Exponential Smooth Transition Autoregressive models appear parsimoniously to capture the nonlinear adjustment. These findings provide an explanation for the empirical regularities noted in the literature on the relation between the real exchange rate and consumption, such as the Backus and Smith (1993) puzzle. Finally, Generalized Impulse Response functions show that shock absorption is significantly faster than suggested in the Purchasing Power Parity puzzle.

Keywords: Real Exchange Rates; Consumption; Nonlinearity (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.lancaster.ac.uk/media/lancaster-univers ... -papers/cons_rxr.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:lan:wpaper:447022

Access Statistics for this paper

More papers in Working Papers from Lancaster University Management School, Economics Department Contact information at EDIRC.
Bibliographic data for series maintained by Giorgio Motta ().