Exchange Rate Volatility and Domestic Consumption in the G7: An Asymmetric Analysis

Abstract

Previous studies that assessed the effects of exchange rate volatility on domestic consumption assumed that the effects are symmetric. In this paper, we argue that due to downward price rigidity, exchange rate volatility could have asymmetric effects on consumption. As in previous research assuming symmetric effects, we only found short-run effects in France and the United States. However, when we assumed the effects to be asymmetric and introduced nonlinear adjustment of the volatility measure, we found short-run asymmetric effects in France, Italy, Japan, the United Kingdom, and the United States. No substantial long-run effects were found.