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 (1) traded and non-traded sectors; (2) financial market incompleteness; (3) preference shocks; (4) deviations from UIP condition for the exchange rates; and (5) 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. © 2010 Springer Science+Business Media, LLC.
Original language | English |
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Pages (from-to) | 365-391 |
Number of pages | 27 |
Journal | Open Economies Review |
Volume | 21 |
Issue number | 3 |
DOIs | |
Publication status | Published - Jul 2010 |
Keywords
- current account dynamics
- real exchange rates
- incomplete markets
- financial frictions
- E32
- F32
- F41