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Title of the item:

Precautionary risks for an open economy.

Title :
Precautionary risks for an open economy.
Authors :
Ferreira, Alex ()
Matos, Paulo ()
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Subjects :
FREE trade
CONSUMPTION (Economics)
BUSINESS cycles
FOREIGN exchange
FOREIGN exchange rates
Source :
International Review of Economics & Finance. Nov2020, Vol. 70, p154-167. 14p.
Geographic Terms :
UNITED States
Academic Journal
Our empirical investigation reveals that the variance of foreign consumption is much higher than the variance of domestic consumption growth for the domestic United States of America (US) resident. We show that precautionary savings in foreign currency arise because of this volatility differential between domestic and imported consumption growth. These open economy stochastic discount factors are later shown to be strongly positively correlated with the US business cycle. We present evidence that the precautionary currency risk must be seen through the lens of an open economy model rather than the traditional durable/non-durable closed economy separation. [ABSTRACT FROM AUTHOR]
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