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

  • Arnab Bhattacharjee


  • Jagjit Chadha


  • Qi Sun


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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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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