Productivity, preferences and UIP deviations in an open economy business cycle model

Arnab Bhattacharjee, Jagjit S. Chadha, Qi Sun

    Research output: Contribution to journalArticle

    2 Citations (Scopus)

    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 languageEnglish
    Pages (from-to)365-391
    Number of pages27
    JournalOpen Economies Review
    Volume21
    Issue number3
    DOIs
    Publication statusPublished - Jul 2010

    Keywords

    • current account dynamics
    • real exchange rates
    • incomplete markets
    • financial frictions
    • E32
    • F32
    • F41

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