Consumption Smoothing and Exchange Rate Volatility

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.
Publication date: November 1995
ISBN: 9781451853049
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Money and Monetary Policy , Globalization , exchange rate , exchange rates , net foreign asset , foreign asset , real exchange rate

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