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

  • Jagjit S. Chadha

    ()

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 School 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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School of Economics, University of Kent, Canterbury, Kent, CT2 7NP

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