The consumption-real exchange rate anomaly: nontraded goods and distribution services

Abstract

In the data, Real Exchange Rates (RERs) tend to move in opposite directions with respect to the relative consumption across countries. Chari <italic>et al</italic>. (2002) refer to the inability of models to replicate the previous stylized fact as the consumption-RER anomaly. In this article, it is shown that an International Real Business Cycle (IRBC) model, similar to the one proposed by Chari <italic>et&#xA0;al</italic>. but extended by considering nontraded goods and an incomplete asset market structure, can solve the anomaly. Nontradable goods amplify wealth effects arising from the incomplete assets market structure, generating a negative co-movement between the RER and relative consumption. Adding Distribution Services (DS) improves the performance of the model in some other dimensions. In particular, DS help to generate countercyclical net exports.