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

20 Pages Posted: 12 Jul 2004

See all articles by Allen C. Head

Allen C. Head

Queen's University (Canada)

Todd D. Mattina

International Monetary Fund (IMF)

Gregor W. Smith

Queen's University (Canada)

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 also consider 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 persistence provides the best match with real exchange rates for OECD countries between 1961 and 2001.

JEL Classification: F41

Suggested Citation

Head, Allen C. and Mattina, Todd D. and Smith, Gregor, Real Exchange Rates, Preferences, and Incomplete Markets: Evidence, 1961-2001. Available at SSRN: https://ssrn.com/abstract=563594

Allen C. Head (Contact Author)

Queen's University (Canada) ( email )

Kingston, Ontario K7L 3N6 K7L 3N6
Canada

Todd D. Mattina

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Gregor Smith

Queen's University (Canada) ( email )

Department of Economics
Queen's University
Kingston, Ontario K7L 3N6
Canada

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