Risk Sharing and Real Exchange Rate: The Roles of Non-tradable Sector and Trend Shocks

Huseyin Cagri Akkoyun, Yavuz Arslan and Mustafa Kilinc

Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

Abstract: In this paper, we show that tradable and non-tradable TFP processes of the US and Europe have unit roots and can be modeled by a vector error correction model (VECM). Then, we develop a standard two country and two good (tradable and non-tradable) DSGE model. Our model implies that using cointegrated TFP processes improves the real exchange rate (RER) volatility and risk sharing puzzles compared to the model with transitory TFP processes. Cointegrated TFP shocks, or trend shocks, generate signi?cant income e�ects, and amplify the mechanisms that produce high RER volatility. Moreover, trend shocks break the tight link between relative consumption and RER for low and high values of trade elasticity parameters.

Keywords: Trends Shocks; Risk Sharing; Real Exchange Rates (search for similar items in EconPapers)
JEL-codes: E32 F41 F44 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
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https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN ... g+Paperss/2013/13-36 (application/pdf)

Related works:
Journal Article: Risk sharing and real exchange rates: The role of non-tradable sector and trend shocks (2017)
Working Paper: Risk sharing and real exchange rates: the role of non-tradable sector and trend shocks (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:1336

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