Risk sharing and real exchange rates: The role of non-tradable sector and trend shocks

Huseyin Akkoyun (), Yavuz Arslan and Mustafa Kilinc

Journal of International Money and Finance, 2017, vol. 73, issue PA, 232-248

Abstract: In this paper, we show that the tradable and non-tradable total factor productivity (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 and including non-tradables help solve the real exchange rate (RER) volatility and risk sharing puzzles. Cointegrated TFP shocks, or trend shocks, generate significant income effects and amplify the mechanisms that produce high RER volatility. Moreover, trend shocks can break the tight link between relative consumption and RER for low and high values of trade elasticity parameters. The non-tradable sector in the model improves the results for the risk sharing significantly.

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: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Risk sharing and real exchange rates: the role of non-tradable sector and trend shocks (2017)
Working Paper: Risk Sharing and Real Exchange Rate: The Roles of Non-tradable Sector and Trend Shocks (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:73:y:2017:i:pa:p:232-248

DOI: 10.1016/j.jimonfin.2017.02.003

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