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Real exchange rates, preferences, and incomplete markets: evidence, 1961–2001
Author(s) -
Head Allen C.,
Mattina Todd D.,
Smith Gregor W.
Publication year - 2004
Publication title -
canadian journal of economics/revue canadienne d'économique
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.773
H-Index - 69
eISSN - 1540-5982
pISSN - 0008-4085
DOI - 10.1111/j.0008-4085.2004.00248.x
Subject(s) - economics , exchange rate , incomplete markets , consumption (sociology) , marginal utility , asset (computer security) , habit , microeconomics , monetary economics , econometrics , government (linguistics) , psychology , social science , computer security , sociology , computer science , psychotherapist , linguistics , philosophy
. Many international macroeconomic models link the real exchange rate to a ratio of marginal utilities. We examine this link empirically, allowing the marginal utility of consumption to depend on government expenditure, real money balances, or external habit. We also consider two environments with incomplete asset markets; one with exogenously missing markets but an endogenous discount rate that anchors the distribution of wealth and one with endogenous market segmentation. Although none of these satisfies theoretical and over‐identifying restrictions for every country, utility with external habit persistence provides the best match with real exchange rates for OECD countries between 1961 and 2001. JEL classification: F41