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Household Heterogeneity and the Real Exchange Rate: Still a PuzzleRobert KollmannECARES, Université Libre de Bruxelles; University of Paris XII - Department of Economics; Centre for Economic Policy Research (CEPR) May 2009 CEPR Discussion Paper No. DP7301 Abstract: Kocherlakota and Pistaferri (EJ, 2007) [KP] develop a model of a world economy with private-information Pareto optimal (PIPO) risk sharing; in that model, the real exchange rate tracks relative domestic/foreign cross-sectional distributions of consumption. KP claim that the PIPO model fits the UK/US real exchange rate well. This paper shows that the PIPO model is inconsistent with the UK/US data. Minor specification changes overturn KPs regression results. I also document that the relevant (relative) cross-sectional consumption moment is orders of magnitude more volatile than the real exchange rate, and less persistent. The link between the real exchange rage and consumption (heterogeneity) remains a puzzle.
Number of Pages in PDF File: 18 Keywords: heterogeneity, International risk sharing, real exchange rate JEL Classification: F36, F41 working papers seriesDate posted: July 15, 2009Suggested CitationContact Information
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