Consumption Smoothing and Exchange Rate Volatility

Consumption Smoothing and Exchange Rate Volatility PDF

Author: Mr.Bart Turtelboom

Publisher: International Monetary Fund

Published: 1995-11-01

Total Pages: 56

ISBN-13: 1451853041

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This paper analyzes exchange rate behavior in a model where consumers trade goods to diversify shocks to their income. A model with traded and nontraded goods is simulated in a multilateral context based upon historical output correlations for the period 1970–92. Simulation results indicate that the observed volatility of multilateral real exchange rates for the United States, Germany and Japan is not inconsistent with exchange rate volatility implied by consumption-smoothing behavior.

Exchange Rate Volatility, Pricing to Market and Trade Smoothing

Exchange Rate Volatility, Pricing to Market and Trade Smoothing PDF

Author: Peter B. Clark

Publisher: International Monetary Fund

Published: 1997-10

Total Pages: 46

ISBN-13:

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This paper investigates the consequences of exchange rate volatility on the variability of export prices and quantities in the presence of market segmentation and pricing to market. Firms stabilize destination prices through systematic price discrimination, limiting the degree of exchange rate pass-through. Consequently, the variability of exchange rates is not fully translated into prices and quantities at the point of destination. Empirical estimates using aggregate price data for the G-7 industrial countries show incomplete pass-through in variances, with considerable variation among these countries. U.S. industry specific data also indicate incomplete pass-through in most cases, with considerable variation across industries.

Real Interest Rates, Real Exchange Rates, and Net Foreign Assets in the Adjustment Process

Real Interest Rates, Real Exchange Rates, and Net Foreign Assets in the Adjustment Process PDF

Author: Mr.Thomas Helbling

Publisher: International Monetary Fund

Published: 1995-12-01

Total Pages: 38

ISBN-13: 1451934734

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This paper analyzes the recent behavior of real exchange rates, the trade balance and the net foreign asset position of the United States in an intertemporal optimizing model of the world economy that incorporates heterogeneity across countries and imperfect international capital and good markets. While the model successfully tracks the dynamics of trade balances and net foreign assets it generates too much consumption smoothing and excessively volatile relative prices. Resolving these inadequacies simultaneously is difficult as the elasticity of substitution between tradables and nontradables affects in opposite ways the degree of consumption smoothing and the volatility of relative prices.

Mean Reversion and Consumption Smoothing

Mean Reversion and Consumption Smoothing PDF

Author: Fischer Black

Publisher:

Published: 1989

Total Pages: 36

ISBN-13:

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Using a simple conventional model with additive separable utility and constant elasticity, we can explain mean reversion and consumption smoothing. The model uses the price of risk and wealth as state variables, but has only one stochastic variable. The price of risk rises temporarily as wealth falls. We also distinguish between risk aversion and the consumption elasticity of marginal utility. We can use the model to match estimates of the average values of consumption volatility, wealth volatility, mean reversion, the growth rate of consumption, the real interest rate, and the market risk premium.

Currency Portfolio of External Debt, Exchange Rate Cyclicality, and Consumption Volatility

Currency Portfolio of External Debt, Exchange Rate Cyclicality, and Consumption Volatility PDF

Author: Eiji Fujii

Publisher:

Published: 2020

Total Pages:

ISBN-13:

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Even though external debt can play a buffer role against adverse shocks to assist consumption smoothing, it may also exert a volatility amplifying effect, depending on the currency of denomination and the cyclicality of the borrower's exchange rate. We empirically investigate the nexus between the debt denomination portfolio, exchange rate cyclicality, and consumption volatility of low- and middle-income countries. On constructing the debt-weighted effective exchange rates, we examine how the denomination portfolio affects the debtors' exchange rate cyclicality to influence the consumption response to transitory income shocks. We find that portfolio concentration enhances exchange rate pro-cyclicality, which makes consumption more volatile when income shocks occur. Our results suggest that portfolio diversification is a useful tool for countries with original sin to hedge against bumpy consumption paths.

Traded Goods Consumption Smoothing and the Random Walk Behavior of the Real Exchange Rate

Traded Goods Consumption Smoothing and the Random Walk Behavior of the Real Exchange Rate PDF

Author: Kenneth Rogoff

Publisher:

Published: 1992

Total Pages: 36

ISBN-13:

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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.

Business Cycle Volatility and Openness

Business Cycle Volatility and Openness PDF

Author: Assaf Razin

Publisher:

Published: 1992

Total Pages: 46

ISBN-13:

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This paper links business cycle volatility to barriers on international mobility of goods and capital. Theory predicts that capital market integration should lower consumption volatility while raising investment volatility, if most shocks are country-specific and transitory. The removal of barriers to trade in goods should enhance specialization and hence output volatility. We test these ideas using a unique panel data set which includes indicators of barriers to trade in both goods and capital flows. However, our empirical results indicate that neither the degree of capital mobility, nor the degree of goods mobility is strongly correlated with the volatility of consumption, investment or output. This may reflect the fact that many business cycle shocks are both persistent and common to many countries.

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