Risk Sharing and Real Exchange Rate : The Roles of Non-tradable Sector and Trend Shocks
AbstractIn this paper, we show that tradable and non-tradable TFP processes of the US and Europe have unit roots and can be modeled by a vector error correction model (VECM). Then, we develop a standard two country and two good (tradable and non-tradable) DSGE model. Our model implies that using cointegrated TFP processes improves the real exchange rate (RER) volatility and risk sharing puzzles compared to the model with transitory TFP processes. Cointegrated TFP shocks, or trend shocks, generate signi?cant income e¤ects, and amplify the mechanisms that produce high RER volatility. Moreover, trend shocks break the tight link between relative consumption and RER for low and high values of trade elasticity parameters.
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Bibliographic InfoPaper provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its series Working Papers with number 1336.
Date of creation: 2013
Date of revision:
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Trends Shocks; Risk Sharing; Real Exchange Rates;
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-10-18 (All new papers)
- NEP-DGE-2013-10-18 (Dynamic General Equilibrium)
- NEP-MAC-2013-10-18 (Macroeconomics)
- NEP-OPM-2013-10-18 (Open Economy Macroeconomics)
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