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Consumption home bias and exchange rate behavior

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  • Cooke, Dudley

Abstract

This paper studies the response of the nominal exchange rate to monetary shocks in an economy with consumption home bias (CHB). When wages are sticky monetary shocks produce exchange rate dynamics. A liquidity effect and a net foreign asset effect determine the extent of these dynamics. I demonstrate that the exchange rate dynamics generated through these two channels are greater the more consumption is biased towards locally produced goods. I also show the influence of consumption home bias is stronger (weaker) when monetary shocks result in a negative (positive) net foreign asset position.

Suggested Citation

  • Cooke, Dudley, 2010. "Consumption home bias and exchange rate behavior," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 415-425, March.
    • Handle: RePEc:eee:jmacro:v:32:y:2010:i:1:p:415-425
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    Cited by:

    1. Gehrke, Britta & Yao, Fang, 2013. "Sources of Real Exchange Rate Fluctuations: The Role of Supply Shocks Revisited," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79821, Verein für Socialpolitik / German Economic Association.
    2. Chung-Fu Lai, 2016. "Tariff, Consumption Home Bias and Macroeconomic Dynamics," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 6(8), pages 425-444, August.

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