Consumption and real exchange rates in dynamic economies with non-traded goods
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AbstractWe 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.