Consumption and real exchange rates in professional forecasts
Michael B. Devereux, Gregor W. Smith, James Yetman, Bank for International Settlements. Monetary and Economic Dept
Bank for International Settlements, 2009 - Business & Economics - 45 pages
Standard models of international risk sharing with complete asset markets predict a positive association between relative consumption growth and real exchange-rate depreciation across countries. The striking lack of evidence for this link the consumption/real-exchange-rate anomaly or Backus-Smith puzzle - has prompted research on risk-sharing indicators with incomplete asset markets. That research generally implies that the association holds in forecasts, rather than realizations. Using professional forecasts for 28 countries for 1990-2008 we find no such association, thus deepening the puzzle. Independent evidence on the weak link between forecasts for consumption and real interest rates suggests that the presence of 'hand-to-mouth' consumers may help to resolve the anomaly.
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aggregate Backus and Smith Backus-Smith puzzle Benigno and Thoenissen’s complete-markets conditional expectations conditional risk sharing constrained households consumption and real consumption growth differentials consumption-real exchange rate correlation test Corsetti country-pair country’s covariance currency Dedola deﬁned economy Economy-Pair Means estimation Euler equation Euro area evidence ex-post growth rate exchange rate anomaly exchange rate growth expected consumption growth expected real exchange Figure ﬁnd ﬁndings ﬁrst ﬁxed forecast data Forecast Means growth and real hand-to-mouth consumers I I I I I I I I I incomplete markets interest rates International risk sharing Kollmann Leduc Means Forecasts monotonicity-in-means test negative correlation nominal exchange rate notation numeraire Obstfeld OECD pairs of countries positive relationship predictions professional forecasts real depreciation real exchange rate reﬂect relative consumption growth risk-sharing condition scatter plots signiﬁcant simulations Smith and Yetman speciﬁc sticky price stylized fact terms of trade traded and non-traded unconditional means unconstrained upward-sloping line wealth effect