Productivity, Preferences and UIP Deviations in an Open Economy Business Cycle Model

Arnab Bhattacharjee, Jagjit S. Chadha, Qi Sun

    Research output: Contribution to journalArticlepeer-review

    Abstract

    We show that a flex-price two-sector open economy DSGE model can explain the poor degree of international risk sharing and exchange rate disconnect. We use a suite of model evaluation measures and examine the role of (1) traded and non-traded sectors; (2) financial market incompleteness; (3) preference shocks; (4) deviations from UIP condition for the exchange rates; and (5) creditor status in net foreign assets. We find that there is a good case for both traded and non-traded productivity shocks as well as UIP deviations in explaining the puzzles.

    Original languageEnglish
    Pages (from-to)365-391
    Number of pages27
    JournalOpen Economies Review
    Volume21
    Issue number3
    DOIs
    Publication statusPublished - Jul 2010

    Keywords

    • Current account dynamics
    • Real exchange rates
    • Incomplete markets
    • Financial frictions
    • REAL EXCHANGE-RATES
    • COVARIANCE-MATRIX
    • NONTRADED GOODS
    • HOME BIAS
    • EXPECTATIONS
    • CONSUMPTION
    • TRADE
    • TESTS

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