Testing for linear and nonlinear Granger causality in the real exchange rate-consumption relation

- IRBC models predict a relationship between real exchange rates and consumption.
- This theoretical prediction is not supported by the empirical literature.
- We apply linear and nonlinear Granger-causality tests to data for 14 OECD countries.
- The null of no-Granger causality is rejected for the majority of countries.

International real business cycle models predict a relationship between real exchange rates and consumption. This prediction is not supported by the empirical literature. In a new approach, we apply nonlinear Granger-causality tests to data for 14 OECD countries.