Template-Type: ReDIF-Paper 1.0
Author-Name: Efthymios Pavlidis
Author-Name-First: Efthymios
Author-Name-Last: Pavlidis
Author-Name: Ivan Paya
Author-Name-First: Ivan
Author-Name-Last: Paya
Author-Name: David Peel
Author-Name-First: David
Author-Name-Last: Peel
Title: Further empirical evidence on the consumption-real exchange rate anomaly.
Abstract: This paper adopts a nonlinear framework to model the deviations of the real exchange rate from its fundamental
value implied by International Real Business Cycle models with complete asset markets. By focusing
on the post Bretton Woods era, we find that in several cases there is a long run relationship between real exchange
rates and consumption series in line with international risk sharing. Further, linearity tests indicate
that the majority of the deviation processes exhibit significant smooth transition nonlinearity. Exponential
Smooth Transition Autoregressive models appear parsimoniously to capture the nonlinear adjustment. These
findings provide an explanation for the empirical regularities noted in the literature on the relation between
the real exchange rate and consumption, such as the Backus and Smith (1993) puzzle. Finally, Generalized
Impulse Response functions show that shock absorption is significantly faster than suggested in the
Purchasing Power Parity puzzle.
Creation-Date: 2010
File-URL: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/cons_rxr.pdf
File-Format: application/pdf
Number: 447022
Classification-JEL: 
Keywords: Real Exchange Rates, Consumption, Nonlinearity
Handle: RePEc:lan:wpaper:447022