Keeping up with the Joneses and exchange rate volatility in a Redux model

Article history: Received 17 April 2012 Received in revised form 11 August 2013 Accepted 12 August 2013 Available online 27 August 2013 By incorporating a keeping-up-with-the-Joneses preference into the Redux model, this paper sketches the implications of consumption externalities for the short-run and long-run equilibria. We show that the size of the consumption externality plays a crucial role in terms of affecting the long-run and short-run effects of important economic variables. Keepingup-with-the-Joneses in relation to domestic benchmark consumption has the effect of magnifying the impact of monetary shocks on the exchange rate. Besides, simple numerical analyses show that the exchange rate volatility is raised (reduced) by an increasing rate as the size of the externality in regard to domestic (foreign) consumption increases. © 2013 Elsevier Inc. All rights reserved. JEL classifications: E210 F310 F410