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

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

Research output: Working paperDiscussion paper

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Authors

  • Arnab Bhattacharjee
  • Qi Sun
  • Jagjit S. Chadha

Research units

Info

Original languageEnglish
Place of publicationSt. Andrews
PublisherScottish Institute for Research in Economics
Publication date2008
Number of pages56
StatePublished

Publication series

NameSIRE Discussion Papers
PublisherScottish Institute for Research in Economics
No.2008-53

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 (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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