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

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Author Info
Jagjit S. Chadha ()

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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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Paper provided by Department of Economics, University of Kent in its series Studies in Economics with number 0808.

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Date of creation: Aug 2008
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Handle: RePEc:ukc:ukcedp:0808

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Postal: Department of Economics, University of Kent at Canterbury, Canterbury, Kent, CT2 7NP
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Related research
Keywords: current account dynamics; real exchange rates; incomplete markets; financial frictions;

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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