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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
Number of pages56
StatePublished - 2008

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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