Traded Goods Consumption Smoothing and the Random Walk Behavior of the Real Exchange Rate
36 Pages Posted: 27 Apr 2000 Last revised: 5 Oct 2022
Date Written: July 1992
Abstract
Conventional explanations of the near random walk behavior of real exchange rates rely on near random walk behavior in the underlying fundamentals (e.g.. tastes and technology). The present paper offers an alternative rationale, based on a fixed-factor neoclassical model with traded and non-traded goods. The basic idea is that with open capital markets, agents can smooth their consumption of tradeables in the face of transitory traded goods productivity shocks. Agents cannot smooth non-traded goods productivity shocks, but if these are relatively small (as is often argued to be the case) then traded goods consumption smoothing will lead to smoothing of the intra-temporal price of traded and non-traded goods. The (near) random walk implications of the model for the real exchange rate are in stark contrast to the empirical predictions of the classic Balassa-Samuelson model. The paper applies the model to the yen/dollar exchange rate over the floating rate period.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
International Evidence on Tradables and Nontradables Inflation
-
By Matthew B. Canzoneri, Robert E. Cumby, ...
-
International Evidence on Tradables and Nontradable Inflation
-
Exchange Rates and Economic Fundamentals: A Methodological Comparison of Beers and Feers
By Peter B. Clark and Ronald Macdonald
-
Real Exchange Rates in the Developing Countries: Concepts and Measure- Ment
-
The EMS, the Emu, and the Transition to a Common Currency
By Kenneth Froot and Kenneth Rogoff
-
Real Exchange Rates and Productivity Growth in the United States and Japan
-
Asset Markets, Exchange Rates and the Balance of Payments
By Jacob A. Frenkel and Michael L. Mussa
-
By Enrique Alberola, Humberto Lopez, ...
-
Long-Run Exchange Rate Modeling: A Survey of the Recent Evidence