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

Arnab Bhattacharjee, Jagjit S. Chadha, Qi Sun

    Research output: Working paper

    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.
    Original languageEnglish
    Place of PublicationSt. Andrews
    PublisherCentre for Dynamic Macroeconomic Analysis
    Publication statusPublished - 2008

    Publication series

    NameCDMA Working Paper Series

    Keywords

    • current account dynamics
    • real exchange rates
    • financial frictions
    • incomplete markets

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  • Cite this

    Bhattacharjee, A., Chadha, J. S., & Sun, Q. (2008). Productivity, preferences and UIP deviations in an open economy business cycle model. (CDMA Working Paper Series). Centre for Dynamic Macroeconomic Analysis. http://ideas.repec.org/p/san/cdmawp/0808.html