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Backus–Smith puzzle and the European Union: It’s not just the nominal exchange rate

Predrag Petrović ; Institut društvenih nauka, Beograd, Srbija

Puni tekst: engleski pdf 2.270 Kb

str. 393-418

preuzimanja: 594



The goal of our research is testing of presence and background examination of
Backus–Smith puzzle in the EU. The research is based on the technique of
econometric analysis of panel data, i.e. on the estimation of one-way/two-way
error component models and models without effects. The results of the research
have shown that: (a) there is serious evidence on presence of the Backus–Smith
puzzle in the EU, (b) its background comprises both nominal exchange rate and
inflation differential, and (c) empirical data rejects complete risk sharing
assumption strongly and decisively, but this does not explain the Backus–Smith
puzzle. The basic conclusion of our research is that nominal exchange rate
movements are not the only source of Backus–Smith puzzle in the EU, as is the
case in OECD members states.

Ključne riječi

Backus–Smith puzzle, real exchange rate, complete risk sharing, incomplete risk sharing

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