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Private Consumption, Nontraded Goods and Real Exchange Rate: A Cointegration_Euler Equation Approach

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  • Kenneth S. Lin
Abstract
This paper presents an empirical study of real exchange rate movements from a consumer's perspective. Trade between two countries creates a link between real exchange rate and terms of trade. It is the private consumption of non-traded goods that induces an equilibrium relationship between real exchange rate and private consumption of traded and non-traded goods. We use Ogaki and Park's (1989) cointegration-Euler equation approach to explore long-run implications from the equilibrium relationship. Given the stationary preference shocks assumption, the testable restriction is that real exchange rate and private consumption of traded and non-traded goods in the home and foreign countries are cointegrated. The empirical evidence suggests that private consumption in the home and foreign countries accounts for a significant fraction of the long run movements of real exchange rate in South Korea and Taiwan. Accounting for real government consumption does not overturn the result.

Suggested Citation

  • Kenneth S. Lin, 1996. "Private Consumption, Nontraded Goods and Real Exchange Rate: A Cointegration_Euler Equation Approach," NBER Working Papers 5731, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:5731
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    References listed on IDEAS

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