Backus Smith puzzle (Ofer Abarbanel online library)

In economics, the Backus–Smith puzzle or consumption – real-exchange-rate anomaly is the observation that the correlations between consumption and real exchange rates are zero or negative. This is contrary to economic theory which predicts that with full risk sharing, relative consumption should be perfectly correlated with the real exchange rate. Countries with relative low prices should receive a transfer to take advantage of cheap consumption. This anomaly was first documented by Backus and Smith (1993).[1]


  1. ^Backus, David K.; Smith, Gregor W. (1993), “Consumption and real exchange rates in dynamic economies with non-traded goods” (PDF), Journal of International Economics, 35 (3–4): 297–316, doi:10.1016/0022-1996(93)90021-O


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