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Backus, David K.
Smith, Gregor W.
Year of Publication: 
Series/Report no.: 
Queen's Economics Department Working Paper 1252
We examine the possibility that nontraded goods may account for several striking features of international macroeconomic data: large, persistent deviations from purchasing power parity, small correlations of aggregate consumption fluctuations across countries, and substantial international real interest rate differentials. A dynamic, exchange economy is used to show that nontraded goods in principle can account for each of these phenomena. In the theory there is a close relation between fluctuations in consumption ratios and those in bilateral real exchange rates, but we find little evidence for this relation in time series data for eight OECD countries.
consumption correlations
purchasing power parity
real exchange rates
Document Type: 
Working Paper

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