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Title Understanding the Real Exchange Rate and Consumption: Limited Asset Market Participation
Author Yongseung Jung (Kyung Hee University)
Volume 33 Number 1
Keywords Expenditure Delays, Non-Asset Holders, Real Exchange Rate-Consumption Anomaly
Abstract This paper sets up an open-economy new Keynesian model with limited asset market
participation and expenditure delays to explore the real exchange rate and consumption
anomaly. The main finding of the paper is that relative aggregate consumption move less
closely with the real exchange rate defined as the marginal utility of consumption in foreign
country relative to the marginal utility of consumption in home country when only some
households with expenditure delays can protect themselves from risk by participating in the
financial market and the rest of the households consume their current wage income. The
correlation between the real exchange rate and relative consumption turns into a negative
territory when households are less willing to substitute home goods with foreign goods.
File KER-20170630-33-1-05.pdf
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