TY  - JOUR
AU  - Lin, Kenneth S
TI  - Private Consumption, Nontraded Goods and Real Exchange Rate: A Cointegration_Euler Equation Approach
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5731
PY  - 1996
Y2  - August 1996
DO  - 10.3386/w5731
UR  - http://www.nber.org/papers/w5731
L1  - http://www.nber.org/papers/w5731.pdf
N1  - Author contact info:
Kenneth S. Lin
M1  - published as Kenneth S. Lin. "Private Consumption, Nontraded Goods, and Real Exchange Rate: Evidence from South Korea and Taiwan," in Takatoshi Ito and Anne O. Krueger, editors, "Changes in Exchange Rates in Rapidly Developing Countries: Theory, Practice, and Policy Issues" University of Chicago Press (1999)

AB  - This paper presents an empirical study of real exchange rate movements from a consumer's perspective.  Trade between two countries creates a link between real exchange rate and terms of trade.  It is the private consumption of non-traded goods that induces an equilibrium relationship between real exchange rate and private consumption of traded and non-traded goods.  We use Ogaki and Park's (1989) cointegration-Euler equation approach to explore long-run implications from the equilibrium relationship. Given the stationary preference shocks assumption, the testable restriction is that real exchange rate and private consumption of traded and non-traded goods in the home and foreign countries are cointegrated. The empirical evidence suggests that private consumption in the home and foreign countries accounts for a significant fraction of the long run movements of real exchange rate in South Korea and Taiwan. Accounting for real government consumption does not overturn the result.
ER  -