Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/67773
Authors: 
Devereux, Michael B.
Smith, Gregor W.
Yetman, James
Year of Publication: 
2009
Series/Report no.: 
Queen's Economics Department Working Paper 1195
Abstract: 
Standard models of international risk sharing with complete asset markets predict a positive association between relative consumption growth and real exchange-rate depreciations across countries. The striking lack of evidence for this link - the consumption/real exchange-rate anomaly or Backus-Smith puzzle - has prompted research on risk-sharing indicators with incomplete asset markets. That research generally implies that the association holds in forecasts, rather than realizations. Using professional forecasts for 28 countries for 1990-2008 we find no such association, thus deepening the puzzle. Independent evidence on the weak link between forecasts for consumption and real interest rates suggests that the presence of 'hand-to-mouth' consumers may help to explain the evidence.
Subjects: 
International risk-sharing
Backus-Smith puzzle
JEL: 
F37
F41
F47
Document Type: 
Working Paper

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