Real exchange rates and international co-movement: News-shocks and non-tradable goods with complete markets

Review of Economic Dynamics, 2020, vol. 35, 154-169

Abstract: We propose a fully flexible, complete-market model of the international business cycle that is consistent with a negative correlation between the real exchange rate and relative consumption (the Backus-Smith puzzle). We allow for imperfect substitutability of capital which significantly reinforces Harrold-Balassa-Samuelson effects, producing more empirically relevant movements in real exchange rates. Most importantly, we introduce changes in expectations (news-shocks) as an explanation to the Backus-Smith puzzle, through shifts in relative demand. However, news-shocks also contribute to lower cross-country correlations of economic aggregates, deteriorating international co-movement. (Copyright: Elsevier)

Keywords: Backus-Smith puzzle; Real-exchange rates; News-driven cycles (search for similar items in EconPapers)
JEL-codes: F41 F44 (search for similar items in EconPapers)
Date: 2020
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Software Item: Code and data files for "Real exchange rates and international co-movement: News-shocks and non-tradable goods with complete markets" (2019)
Working Paper: Online Appendix to "Real exchange rates and international co-movement: News-shocks and non-tradable goods with complete markets" (2019)
Working Paper: Real exchange rates and international co-movement: news-shocks and non-tradable goods with complete markets (2016)
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DOI: 10.1016/j.red.2019.06.001

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