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USING DEMOGRAPHIC CHANGES TO REVISIT THE CONSUMPTION–REAL EXCHANGE RATE ANOMALY

Authors

  • SHIU-SHENG CHEN

    1. National Taiwan University
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    • I would like to thank the anonymous referee for comments and suggestions on an earlier version of this paper. Any remaining errors are my own. Grants from the National Science Council (NSC 99-2410-H-002-046) is gratefully acknowledged.


  • Manuscript received 11.1.10; final version received 6.3.11.

Abstract

I use a panel data set covering 26 OECD countries between 1960 and 2004 to revisit the consumption–real exchange rate anomaly. After using demographic variables (in particular, the fertility rate) as instruments, I document a new empirical regularity that higher real exchange rates are associated with higher relative consumption. This positive relationship is statistically significant and has been shown to be robust. Such a finding may suggest that the theoretical prediction in Backus and Smith (Journal of International Economics, Vol. 35 (1993), pp. 297–316) is no longer at odds with the data.

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