The international RBC model finally works!

Sushant Acharya, Edouard Challe and Louphou Coulibaly

No 21683, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We show that incorporating uninsurable countercyclical income risk into a standard international RBC model can qualitatively and quantitatively account for the quantity puzzles in open-economy macro, namely (i) the Backus-Smith puzzle, (ii) the Backus-Kehoe-Kydland puzzle and (iii) the weak correlation between the trade balance and the exchange rate. We also show that our model can simultaneously account for the Fama puzzle and the evidence that high interest rate countries have stronger currencies---which representative-agents models that rely only on financial or demand shocks cannot jointly account for. Crucially, our model resolves all these puzzles while relying solely on productivity shocks, and thus generates the observed domestic and cross-country macroeconomic comovement.

JEL-codes: F41 F44 (search for similar items in EconPapers)
Date: 2026-06
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP21683 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:21683

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP21683

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().