Sažetak
The research seeks to uncover how real consumption reacts to real exchange rate uncertainty in the short and long run for the world’s largest monetary union- the Eurozone. Twelve eurozone countries were sampled covering the period 1995Q1-2019Q4. Using generalized autoregressive conditional heteroskedasticity (GARCH) and pooled mean group (PMG), the result shows that exchange rate uncertainty significantly dampens long-run consumption while the short-run effect is mixed. In the benchmark model, a negative and significant error correction coefficient was obtained which allows to argue that i) there is evidence of a return to the long-run equilibrium path for consumption following short run deviations and ii) the speed of adjustment to equilibrium is low, with a coefficient of ~ 4%. This suggests that, in the eurozone, convergence to long-run equilibrium is slow, as the proportion of disequilibrium corrected in one quarter, following a shock, is about 4%, which implies it would take ~17 quarters for one half of the disequilibrium, or deviations from the long-run consumption path, to become corrected.
