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

Arnab Bhattacharjee, Jagjit S. Chadha, Qi Sun

    Research output: Working paper/PreprintWorking paper

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    We show that a ‡ex-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.
    Original languageEnglish
    Place of PublicationSt. Andrews
    PublisherCentre for Dynamic Macroeconomic Analysis
    Number of pages55
    Publication statusPublished - 2008

    Publication series

    NameCDMA Working Paper Series
    Publisher School of Economics and Finance, University of St. Andrews


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


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