Real Exchange Rates, Preferences, And Incomplete Markets: Evidence, 1961-2001

Allen Head () and Gregor Smith

No 1246, Working Paper from Economics Department, Queen's University

Abstract: Many international macroeconomic models link the real exchange rate to a ratio of marginal utilities. We examine this link empirically, allowing the marginal utility of consumption to depend on government expenditure, real money balances, or external habit. We alsoconsider two environments with incomplete asset markets; one with exogenously missing markets but an endogenous discount rate that anchors the distribution of wealth and one with endogenous market segmentation. Although none of these satisfies theoretical and over-identifying restrictions for every country, utility with external habit persistenceprovides the best match with real exchange rates for OECD countries between 1961 and 2001.

Keywords: real exchange rate; consumption; marginal utility (search for similar items in EconPapers)
JEL-codes: F41 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2004-01
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Citations: View citations in EconPapers (9)

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https://www.econ.queensu.ca/sites/econ.queensu.ca/files/wpaper/qed_wp_1246.pdf First version 2004 (application/pdf)

Related works:
Journal Article: Real exchange rates, preferences, and incomplete markets: evidence, 1961-2001 (2004)
Journal Article: Real exchange rates, preferences, and incomplete markets: evidence, 1961–2001 (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:qed:wpaper:1246

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