The Korean Economic Review
Understanding the Real Exchange Rate and Consumption: Limited Asset Market Participation
Yongseung Jung (Kyung Hee University)Year 2017Vol. 33No. 1
This paper sets up an open-economy new Keynesian model with limited asset marketparticipation and expenditure delays to explore the real exchange rate and consumptionanomaly. The main finding of the paper is that relative aggregate consumption move lessclosely with the real exchange rate defined as the marginal utility of consumption in foreigncountry relative to the marginal utility of consumption in home country when only somehouseholds with expenditure delays can protect themselves from risk by participating in thefinancial market and the rest of the households consume their current wage income. Thecorrelation between the real exchange rate and relative consumption turns into a negativeterritory when households are less willing to substitute home goods with foreign goods.