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International risk cycles

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  • Gourio, François
  • Siemer, Michael
  • Verdelhan, Adrien

Abstract

Recent work in international finance suggests that exchange rate puzzles can be accounted for if (1) aggregate uncertainty is time-varying, and (2) countries have heterogeneous exposures to a world aggregate shock. We embed these features in a standard two-country real business cycle framework, and calibrate the model to equity risk premia in low and high interest rates countries. Unlike traditional real business cycle models, our model generates volatile exchange rates, a large currency forward premium, “excess comovement” of asset prices relative to quantities, and an imperfect correlation between relative consumption growth and exchange rates. Our model implies, however, that high interest rate countries have smoother quantities, equity returns and interest rates than low interest rate countries, contrary to the data.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 89 (2013)
Issue (Month): 2 ()
Pages: 471-484

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Handle: RePEc:eee:inecon:v:89:y:2013:i:2:p:471-484

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Web page: http://www.elsevier.com/locate/inca/505552

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Keywords: Business cycles; Time-varying risk premia; Disasters; Backus–Smith puzzle; Forward premium puzzle;

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References

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Citations

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Cited by:
  1. Eric van Wincoop, 2011. "International Contagion Through Leveraged Financial Institutions," NBER Working Papers 17686, National Bureau of Economic Research, Inc.
  2. Robert Ready & Nikolai Roussanov & Colin Ward, 2013. "Commodity Trade and the Carry Trade: a Tale of Two Countries," NBER Working Papers 19371, National Bureau of Economic Research, Inc.
  3. Lustig, Hanno & Roussanov, Nikolai & Verdelhan, Adrien, 2014. "Countercyclical currency risk premia," Journal of Financial Economics, Elsevier, vol. 111(3), pages 527-553.
  4. A. Craig Burnside & Jeremy J. Graveline, 2013. "Exchange Rate Determination, Risk Sharing and the Asset Market View," Working Papers 13-1, Duke University, Department of Economics.
  5. Ricardo J. Caballero & Joseph B. Doyle, 2012. "Carry Trade and Systemic Risk: Why are FX Options so Cheap?," NBER Working Papers 18644, National Bureau of Economic Research, Inc.
  6. Kristin J. Forbes & Francis E. Warnock, 2011. "Capital Flow Waves: Surges, Stops, Flight, and Retrenchment," NBER Chapters, in: Global Financial Crisis National Bureau of Economic Research, Inc.
  7. Jeremy Graveline & Irina Zviadadze & Mikhail Chernov, 2012. "Crash Risk in Currency Returns," 2012 Meeting Papers 753, Society for Economic Dynamics.
  8. Yan Carrière–Swallow & Luis Felipe Céspedes, 2011. "The Impact of Uncertainty Shocks in Emerging Economies," Working Papers Central Bank of Chile 646, Central Bank of Chile.
  9. Engel, Charles, 2011. "The Real Exchange Rate, Real Interest Rates, and the Risk Premium," Economics Series 265, Institute for Advanced Studies.
  10. Max Gillman & Michal Kejak & Michal Pakos, 2014. "Learning about Disaster Risk: Joint Implications for Consumption and Asset Prices," CERGE-EI Working Papers wp507, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  11. Dmitriev, Alexandre & Roberts, Ivan, 2013. "The cost of adjustment: On comovement between the trade balance and the terms of trade," Economic Modelling, Elsevier, vol. 35(C), pages 689-700.
  12. Max Gillman & Michal Kejak & Michal Pakos, 2014. "Learning about Rare Disasters: Implications for Consumptions and Asset Prices," CEU Working Papers 2014_2, Department of Economics, Central European University.
  13. Nicola Spatafora & Oana Luca, 2012. "Capital Inflows, Financial Development, and Domestic Investment," IMF Working Papers 12/120, International Monetary Fund.
  14. Charles Engel, 2013. "Exchange Rates and Interest Parity," NBER Working Papers 19336, National Bureau of Economic Research, Inc.

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