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Understanding the Real Exchange Rate and Consumption: Limited Asset Market Participation

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  • Yongseung Jung

    (Kyung Hee University)

Abstract

This paper sets up an open-economy new Keynesian model with limited asset market participation and expenditure delays to explore the real exchange rate and consumption anomaly. The main finding of the paper is that relative aggregate consumption move less closely with the real exchange rate defined as the marginal utility of consumption in foreign country relative to the marginal utility of consumption in home country when only some households with expenditure delays can protect themselves from risk by participating in the financial market and the rest of the households consume their current wage income. The correlation between the real exchange rate and relative consumption turns into a negative territory when households are less willing to substitute home goods with foreign goods.

Suggested Citation

  • Yongseung Jung, 2017. "Understanding the Real Exchange Rate and Consumption: Limited Asset Market Participation," Korean Economic Review, Korean Economic Association, vol. 33, pages 127-152.
    • Handle: RePEc:kea:keappr:ker-20170630-33-1-05
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    References listed on IDEAS

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    More about this item

    Keywords

    Expenditure Delays; Non-Asset Holders; Real Exchange Rate-Consumption Anomaly;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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