In economics, the Backus–Smith puzzle or consumption – real-exchange-rate anomaly is the observation that the

correlations In statistics, correlation or dependence is any statistical relationship, whether causal or not, between two random variables or bivariate data. Although in the broadest sense, "correlation" may indicate any type of association, in statistics ...

between

consumption Consumption may refer to: *Resource consumption *Tuberculosis, an infectious disease, historically * Consumption (ecology), receipt of energy by consuming other organisms * Consumption (economics), the purchasing of newly produced goods for curre ...

and

real exchange rate In finance, an exchange rate is the rate at which one currency will be exchanged for another currency. Currencies are most commonly national currencies, but may be sub-national as in the case of Hong Kong or supra-national as in the case of t ...

s are zero or negative. This is contrary to economic theory which predicts that with full

risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environme ...

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).

References

International finance International macroeconomics Economic puzzles {{macroeconomics-stub