The real exchange rate and household consumption heterogeneity: Testing Kocherlakota and Pistaferri's (2007) model

Does household heterogeneity matter for exchange rate determination? This paper tests Kocherlakota and Pistaferri's (2007) prominent heterogeneous agent model, in which the real exchange rate perfectly tracks relative domestic/foreign moments of cross-household consumption distributions. The evidence presented here indicates that the real exchange rate is disconnected from relative cross-household consumption moments. (C) 2021 Elsevier B.V. All rights reserved.

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This paper examines the impact of household heterogeneity on exchange rate determination using a prominent heterogeneous agent model, and finds that the real exchange rate is disconnected from relative cross-household consumption moments.