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

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  • Arnab Bhattacharjee

    ()

  • Jagjit Chadha

    ()

  • Qi Sun

    ()

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 (i) traded and non-traded sectors; (ii) financial market incompleteness; (iii) preference shocks; (iv) deviations from UIP condition for the exchange rates; and (v) 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.

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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 21 (2010)
Issue (Month): 3 (July)
Pages: 365-391

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Handle: RePEc:kap:openec:v:21:y:2010:i:3:p:365-391

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: Current account dynamics; Real exchange rates; Incomplete markets; Financial frictions; E32; F32; F41;

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Cited by:
  1. Jagjit S. Chadha, 2008. "Productivity, Preferences and UIP Deviations in an Open Economy Business Cycle Model," Studies in Economics 0808, Department of Economics, University of Kent.
  2. Matthew Canzoneri & Robert Cumby & Behzad Diba, 2013. "Addressing International Empirical Puzzles: the Liquidity of Bonds," Open Economies Review, Springer, vol. 24(2), pages 197-215, April.

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