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

Jagjit S. Chadha ()

Studies in Economics from Department of Economics, University of Kent

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.

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-mac and nep-opm
Date: 2008-08
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Working Paper: Productivity, Preferences and UIP deviations in an Open Economy Business Cycle Model (2008)
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