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).
- ^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
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder of TBIL.co STATX Fund.