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

Arnab Bhattacharjee; Qi Sun; Jagjit S. Chadha

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

Arnab Bhattacharjee
, Qi Sun
, Jagjit S. Chadha

Research output: Working paper/Preprint › Discussion paper

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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.

Original language	English
Place of Publication	St. Andrews
Publisher	Scottish Institute for Research in Economics
Number of pages	56
Publication status	Published - 2008

Publication series

Name	SIRE Discussion Papers
Publisher	Scottish Institute for Research in Economics
No.	2008-53

Keywords

current account dynamics
real exchange rates
incomplete markets
financial frictions

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SIRE DP 2008 53Final published version, 4.48 MB

Productivity, preferences and UIP deviations in an open economy business cycle model
Bhattacharjee, A., Chadha, J. S. & Sun, Q., 1 Jul 2010, In: Open Economies Review. 21, 3, p. 365-391 27 p.
Research output: Contribution to journal › Article › peer-review
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Productivity, Preferences and UIP deviations in an Open Economy Business Cycle Model
Bhattacharjee, A., Chadha, J. S. & Sun, Q., 2008, St. Andrews: Centre for Dynamic Macroeconomic Analysis, 55 p. (CDMA Working Paper Series; no. CDMA08/08).
Research output: Working paper/Preprint › Working paper

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AB - 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.

KW - current account dynamics

KW - real exchange rates

KW - incomplete markets

KW - financial frictions

M3 - Discussion paper

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

PB - Scottish Institute for Research in Economics

CY - St. Andrews

ER -

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

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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

Cite this