| Reference : The consumption-real exchange rate anomaly with extensive margins |
| E-prints/Working papers : Already available on another site | |||
| Business & economic sciences : Macroeconomics & monetary economics | |||
| http://hdl.handle.net/10993/15266 | |||
| The consumption-real exchange rate anomaly with extensive margins | |
| English | |
Hamano, Masashige  [University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Center for Research in Economic Analysis (CREA) >] | |
| 2013 | |
| Yes | |
| [en] terms of trade ; the Backus-Smith puzzle ; firm entry | |
| [en] This paper investigates a consumption-real exchange rate anomaly from the open
macroeconomics literature known as the Backus-Smith puzzle . We both analytically and quantitatively examine how an expansion of trade along extensive margins can contribute to the puzzle s resolution. Our argument is based on 1) a wealth effect due to changes in the number of product varieties, 2) statistical inefficiency in measuring the number of product varieties, and 3) market incompleteness. Contrary to complete asset markets which, in general, feature overly strong risk sharing properties, changes in the number of product varieties under incomplete markets may produce a wealth e¤ect under high trade elasticity. Since statistical agencies systematically fail to capture the welfare impact arising from that changes, data-consistent terms of trade and real exchange rates tend to appreciate due to this positive wealth effect. This provides a realistic correlation between data-consistent real exchange rates and consumption. | |
| Researchers ; Professionals ; Students | |
| http://hdl.handle.net/10993/15266 | |
| http://wwwfr.uni.lu/content/download/59490/699853/file/2013-01%20-%20The%20consumption-real%20exchange%20rate%20anomaly%20with%20extensive%20margins.pdf |
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