IDEAS home Printed from https://ideas.repec.org/a/eee/jimfin/v73y2017ipap232-248.html
   My bibliography  Save this article

Risk sharing and real exchange rates: The role of non-tradable sector and trend shocks

Author

Listed:
  • Akkoyun, Hüseyin Çağrı
  • Arslan, Yavuz
  • Kılınç, Mustafa

Abstract

In this paper, we show that the tradable and non-tradable total factor productivity (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 and including non-tradables help solve the real exchange rate (RER) volatility and risk sharing puzzles. Cointegrated TFP shocks, or trend shocks, generate significant income effects and amplify the mechanisms that produce high RER volatility. Moreover, trend shocks can break the tight link between relative consumption and RER for low and high values of trade elasticity parameters. The non-tradable sector in the model improves the results for the risk sharing significantly.

Suggested Citation

  • Akkoyun, Hüseyin Çağrı & Arslan, Yavuz & Kılınç, Mustafa, 2017. "Risk sharing and real exchange rates: The role of non-tradable sector and trend shocks," Journal of International Money and Finance, Elsevier, vol. 73(PA), pages 232-248.
    • Handle: RePEc:eee:jimfin:v:73:y:2017:i:pa:p:232-248
    DOI: 10.1016/j.jimonfin.2017.02.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0261560617300190
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jimonfin.2017.02.003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Jonathan Heathcote & Fabrizio Perri, 2013. "The International Diversification Puzzle Is Not as Bad as You Think," Journal of Political Economy, University of Chicago Press, vol. 121(6), pages 1108-1159.
    2. Charles Engel & Akito Matsumoto, 2009. "The International Diversification Puzzle When Goods Prices Are Sticky: It's Really about Exchange-Rate Hedging, Not Equity Portfolios," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(2), pages 155-188, July.
    3. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
    4. Heathcote, Jonathan & Perri, Fabrizio, 2002. "Financial autarky and international business cycles," Journal of Monetary Economics, Elsevier, vol. 49(3), pages 601-627, April.
    5. Baxter, Marianne, 1995. "International trade and business cycles," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 35, pages 1801-1864, Elsevier.
    6. Dotsey, Michael & Duarte, Margarida, 2008. "Nontraded goods, market segmentation, and exchange rates," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1129-1142, September.
    7. Backus, David K. & Smith, Gregor W., 1993. "Consumption and real exchange rates in dynamic economies with non-traded goods," Journal of International Economics, Elsevier, vol. 35(3-4), pages 297-316, November.
    8. Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, vol. 85(1), pages 168-185, March.
    9. Burstein, Ariel & Eichenbaum, Martin & Rebelo, Sergio, 2006. "The importance of nontradable goods' prices in cyclical real exchange rate fluctuations," Japan and the World Economy, Elsevier, vol. 18(3), pages 247-253, August.
    10. Kollmann, Robert, 1995. "Consumption, real exchange rates and the structure of international asset markets," Journal of International Money and Finance, Elsevier, vol. 14(2), pages 191-211, April.
    11. Peter N. Ireland, 2013. "Stochastic Growth In The United States And Euro Area," Journal of the European Economic Association, European Economic Association, vol. 11(1), pages 1-24, February.
    12. Benigno, Gianluca & Thoenissen, Christoph, 2008. "Consumption and real exchange rates with incomplete markets and non-traded goods," Journal of International Money and Finance, Elsevier, vol. 27(6), pages 926-948, October.
    13. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-836, July.
    14. Palacios-Huerta, Ignacio, 2001. "The human capital of stockholders and the international diversification puzzle," Journal of International Economics, Elsevier, vol. 54(2), pages 309-331, August.
    15. Baxter, Marianne & Crucini, Mario J, 1995. "Business Cycles and the Asset Structure of Foreign Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 821-854, November.
    16. Dmitriev, Alexandre & Roberts, Ivan, 2012. "International business cycles with complete markets," Journal of Economic Dynamics and Control, Elsevier, vol. 36(6), pages 862-875.
    17. Mark Aguiar & Gita Gopinath, 2007. "Emerging Market Business Cycles: The Cycle Is the Trend," Journal of Political Economy, University of Chicago Press, vol. 115, pages 69-102.
    18. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2008. "International Risk Sharing and the Transmission of Productivity Shocks," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(2), pages 443-473.
    19. Gianluca Benigno & Hande Küçük, 2012. "Portfolio allocation and international risk sharing," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 45(2), pages 535-565, May.
    20. Stockman, Alan C. & Dellas, Harris, 1989. "International portfolio nondiversification and exchange rate variability," Journal of International Economics, Elsevier, vol. 26(3-4), pages 271-289, May.
    21. Rabanal, Pau & Rubio-Ramírez, Juan F. & Tuesta, Vicente, 2011. "Cointegrated TFP processes and international business cycles," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 156-171, March.
    22. Patrick J. Kehoe & Fabrizio Perri, 2002. "International Business Cycles with Endogenous Incomplete Markets," Econometrica, Econometric Society, vol. 70(3), pages 907-928, May.
    23. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    24. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 745-775, August.
    25. Kose, M. Ayhan & Prasad, Eswar S. & Terrones, Marco E., 2009. "Does financial globalization promote risk sharing?," Journal of Development Economics, Elsevier, vol. 89(2), pages 258-270, July.
    26. V. V Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 533-563.
    27. Cole, Harold L. & Obstfeld, Maurice, 1991. "Commodity trade and international risk sharing : How much do financial markets matter?," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 3-24, August.
    28. Kollmann, Robert, 1996. "Incomplete asset markets and the cross-country consumption correlation puzzle," Journal of Economic Dynamics and Control, Elsevier, vol. 20(5), pages 945-961, May.
    29. Yavuz Arslan & Gursu Keles & Mustafa Kilinc, 2012. "Trend Shocks, Risk Sharing and Cross-Country Portfolio Holdings," Working Papers 1205, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    30. Palacios-Huerta, Ignacio, 2001. "The human capital of stockholders and the international diversification puzzle," Journal of International Economics, Elsevier, vol. 54(2), pages 309-331, August.
    31. Doireann Fitzgerald, 2012. "Trade Costs, Asset Market Frictions, and Risk Sharing," American Economic Review, American Economic Association, vol. 102(6), pages 2700-2733, October.
    32. Finn E. Kydland (ed.), 1995. "Business Cycle Theory," Books, Edward Elgar Publishing, number 565.
    33. Rabanal, Pau & Tuesta, Vicente, 2010. "Euro-dollar real exchange rate dynamics in an estimated two-country model: An assessment," Journal of Economic Dynamics and Control, Elsevier, vol. 34(4), pages 780-797, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ivashchenko, S., 2020. "Long-term growth sources for sectors of Russian economy," Journal of the New Economic Association, New Economic Association, vol. 48(4), pages 86-112.
    2. Kyriacos Lambrias, 2020. "Real exchange rates and international co-movement: News-shocks and non-tradable goods with complete markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 154-169, January.
    3. Carlos A. Yépez, 2020. "International risk sharing in emerging economies," International Finance, Wiley Blackwell, vol. 23(3), pages 434-459, December.
    4. Kyriacos Lambrias, 2020. "Real exchange rates and international co-movement: News-shocks and non-tradable goods with complete markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 154-169, January.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rabanal, Pau & Rubio-Ramírez, Juan F. & Tuesta, Vicente, 2011. "Cointegrated TFP processes and international business cycles," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 156-171, March.
    2. Karabarbounis, Loukas, 2010. "Labor wedges and open economy puzzles," MPRA Paper 31370, University Library of Munich, Germany.
    3. Heathcote, Jonathan & Perri, Fabrizio, 2014. "Assessing International Efficiency," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 523-584, Elsevier.
    4. Gianluca Benigno & Hande Küçük, 2012. "Portfolio allocation and international risk sharing," Canadian Journal of Economics, Canadian Economics Association, vol. 45(2), pages 535-565, May.
    5. Federico Mandelman & Pau Rabanal & Juan Francisco Rubio-Ramirez & Diego Vilan, 2011. "Investment Specific Technology Shocks and International Business Cycles: An Empirical Assessment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 136-155, January.
    6. Kyriacos Lambrias, 2020. "Real exchange rates and international co-movement: News-shocks and non-tradable goods with complete markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 154-169, January.
    7. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2008. "International Risk Sharing and the Transmission of Productivity Shocks," Review of Economic Studies, Oxford University Press, vol. 75(2), pages 443-473.
    8. Evans, Martin D.D. & Hnatkovska, Viktoria V., 2014. "International capital flows, returns and world financial integration," Journal of International Economics, Elsevier, vol. 92(1), pages 14-33.
    9. Kyriacos Lambrias, 2013. "News Shocks, Real Exchange Rates and International Co-Movements," BCL working papers 83, Central Bank of Luxembourg.
    10. Mukherjee, Rahul, 2015. "Institutions, Corporate Governance and Capital Flows," Journal of International Economics, Elsevier, vol. 96(2), pages 338-359.
    11. Cao, Dan & Evans, Martin & Lua, Wenlan, 2020. "Real Exchange Rate Dynamics Beyond Business Cycles," MPRA Paper 99054, University Library of Munich, Germany, revised 10 Mar 2020.
    12. Enders, Zeno & Müller, Gernot J., 2009. "On the international transmission of technology shocks," Journal of International Economics, Elsevier, vol. 78(1), pages 45-59, June.
    13. Cavallari, Lilia, 2022. "The international real business cycle when demand matters," Journal of Macroeconomics, Elsevier, vol. 73(C).
    14. Hnatkovska, Viktoria, 2010. "Home bias and high turnover: Dynamic portfolio choice with incomplete markets," Journal of International Economics, Elsevier, vol. 80(1), pages 113-128, January.
    15. Andrea Raffo, 2008. "Technology Shocks: Novel Implications for International Business Cycles," 2008 Meeting Papers 511, Society for Economic Dynamics.
    16. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2008. "Productivity, External Balance, and Exchange Rates: Evidence on the Transmission Mechanism among G7 Countries," NBER Chapters, in: NBER International Seminar on Macroeconomics 2006, pages 117-194, National Bureau of Economic Research, Inc.
    17. Nicolas Coeurdacier & Hélène Rey, 2013. "Home Bias in Open Economy Financial Macroeconomics," Journal of Economic Literature, American Economic Association, vol. 51(1), pages 63-115, March.
    18. Jonathan Heathcote & Fabrizio Perri, 2013. "The International Diversification Puzzle Is Not as Bad as You Think," Journal of Political Economy, University of Chicago Press, vol. 121(6), pages 1108-1159.
    19. Andrea Raffo, 2006. "Net exports, consumption volatility, and international real business cycle models," Research Working Paper RWP 06-01, Federal Reserve Bank of Kansas City.
    20. Aydan Dogan & Timo Bettendorf, 2020. "Revisiting real exchange rate volatility: non-traded goods and cointegrated TFP shocks," Oxford Economic Papers, Oxford University Press, vol. 72(1), pages 80-100.

    More about this item

    Keywords

    Trends shocks; Risk sharing; Real exchange rates;
    All these keywords.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jimfin:v:73:y:2017:i:pa:p:232-248. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30443 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.