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Consumption and real exchange rates with incomplete markets and non-traded goods

By Gianluca Benigno and Christoph Thoenissen

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 successfully addressed by models that have an incomplete financial market structure and a non-traded as well as traded goods production secto

Topics: HB Economic Theory
Publisher: Elsevier
Year: 2008
DOI identifier: 10.1016/j.jimonfin.2008.04.008
OAI identifier: oai:eprints.lse.ac.uk:35643
Provided by: LSE Research Online
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