TY  - JOUR
AU  - Rogoff,Kenneth
TI  - Traded Goods Consumption Smoothing and the Random Walk Behavior of the Real Exchange Rate
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4119
PY  - 1992
Y2  - July 1992
UR  - http://www.nber.org/papers/w4119
L1  - http://www.nber.org/papers/w4119.pdf
N1  - Author contact info:
Kenneth S. Rogoff
Thomas D Cabot Professor of Public Policy
Economics Department
Harvard University
Littauer Center 216
Cambridge, MA 02138-3001
Tel: 617-495-4022
Fax: 617/495-7730
E-Mail: krogoff@harvard.edu
AB  - Conventional explanations of the near random walk behavior of real exchange rates rely on near random walk behavior in the underlying fundamentals (e.g.. tastes and technology). The present paper offers an alternative rationale, based on a fixed-factor neoclassical model with traded and non-traded goods. The basic idea is that with open capital markets, agents can smooth their consumption of tradeables in the face of transitory traded goods productivity shocks. Agents cannot smooth non-traded goods productivity shocks, but if these are relatively small (as is often argued to be the case) then traded goods consumption smoothing will lead to smoothing of the intra-temporal price of traded and non-traded goods. The (near) random walk implications of the model for the real exchange rate are in stark contrast to the empirical predictions of the classic Balassa-Samuelson model. The paper applies the model to the yen/dollar exchange rate over the floating rate period.
ER  -