Consumption and Real Exchange Rates with Incomplete Markets and Non-Traded Goods

Benigno, Gianluca; Thoenissen, Christoph

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Consumption and Real Exchange Rates with Incomplete Markets and Non-Traded Goods

CEPR Discussion Paper No. 5580

40 Pages Posted: 28 Jun 2006

See all articles by Gianluca Benigno

Gianluca Benigno

Federal Reserve Bank of New York; London School of Economics & Political Science (LSE) - Department of Economics

Christoph Thoenissen

University of St. Andrews - School of Management; Bank of England - Monetary Analysis

There are 2 versions of this paper

Date Written: March 2006

Abstract

This paper addresses the consumption - real exchange rate anomaly. International real business cycle models based on complete financial markets predict a unitary correlation between the real exchange rate and the ratio of home to foreign consumption when subjected to supply side shocks. In the data, this correlation is usually small and often negative. This paper shows that this anomaly can be addressed by models that have an incomplete financial market structure and a non-traded as well as traded goods production sector.

Keywords: Consumption-real exchange rate anomaly, incomplete financial markets, non-traded goods

JEL Classification: F31, F41

Suggested Citation: Suggested Citation

Benigno, Gianluca and Benigno, Gianluca and Thoenissen, Christoph, Consumption and Real Exchange Rates with Incomplete Markets and Non-Traded Goods (March 2006). CEPR Discussion Paper No. 5580, Available at SSRN: https://ssrn.com/abstract=912693