Consumption and Real Exchange Rates in Professional Forecasts

44 Pages Posted: 23 Mar 2009 Last revised: 5 Dec 2022

See all articles by Michael B. Devereux

Michael B. Devereux

University of British Columbia (UBC) - Department of Economics; Centre for Economic Policy Research (CEPR)

Gregor W. Smith

Queen's University (Canada)

James Yetman

Bank for International Settlements (BIS)

Date Written: March 2009

Abstract

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.

Suggested Citation

Devereux, Michael B. and Smith, Gregor and Yetman, James, Consumption and Real Exchange Rates in Professional Forecasts (March 2009). NBER Working Paper No. w14795, Available at SSRN: https://ssrn.com/abstract=1366195

Michael B. Devereux (Contact Author)

University of British Columbia (UBC) - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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Gregor Smith

Queen's University (Canada) ( email )

Department of Economics
Queen's University
Kingston, Ontario K7L 3N6
Canada

James Yetman

Bank for International Settlements (BIS) ( email )

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Basel, Basel-Stadt 4002
Switzerland