Consumption And Real Exchange Rates In Professional Forecasts
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/realexchange-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 the authors 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.