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

Arnab Bhattacharjee (), Jagjit S. Chadha () and Qi Sun ()

CDMA Working Paper Series from Centre for Dynamic Macroeconomic Analysis

Abstract: 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.

Keywords: Current account dynamics; real exchange rates; incomplete markets; financial frictions. (search for similar items in EconPapers)
JEL-codes: E32 F32 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ifn, nep-mac and nep-opm
Date: 2008-11
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Working Paper: Productivity, Preferences and UIP Deviations in an Open Economy Business Cycle Model (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:san:cdmawp:0808

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