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Consumption and real exchange rates in dynamic economies with non-traded goods

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  • Backus, David K.
  • Smith, Gregor W.

Abstract

We examine the possibility that nontraded goods may account for several striking features of international macroeconomic data: large, persistent deviations from purchasing powerparity, small correlations of aggregate consumption fluctuations across countries, and substantialinternational real interest rate differentials. A dynamic, exchange economy is used to show that nontraded goods in principle can account for each of these phenomena. In the theory there is a close relation between fluctuations in consumption ratios and those in bilateral real exchange rates, but we find little evidence for this relation in time series data for eight OECD countries.
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  • Backus, David K. & Smith, Gregor W., 1993. "Consumption and real exchange rates in dynamic economies with non-traded goods," Journal of International Economics, Elsevier, vol. 35(3-4), pages 297-316, November.
    • Handle: RePEc:eee:inecon:v:35:y:1993:i:3-4:p:297-316
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    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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