International Risk Cycles

Francois Gourio, Michael Siemer and Adrien Verdelhan ()

No 17277, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Recent work in international finance suggests that the forward premium puzzle can be accounted for if (1) aggregate uncertainty is time-varying, and (2) countries have heterogeneous exposures to a world aggregate shock. We embed these features in a standard two-country real business cycle framework, and calibrate the model to match the differences between low and high interest rates countries. Unlike traditional real business cycle models, our model generates volatile exchange rates, a large currency forward premium, "excess comovement'' of asset prices relative to quantities, and an imperfect correlation between relative consumption growth and exchange rates. Our model implies, however, that high interest rate countries have smoother quantities, equity returns and interest rates than low interest rate countries, contrary to the data.

JEL-codes: E32 E44 F31 G12 (search for similar items in EconPapers)
Date: 2011-08
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-opm
Note: AP EFG IFM
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Citations: View citations in EconPapers (12)

Published as Gourio, François & Siemer, Michael & Verdelhan, Adrien, 2013. "International risk cycles," Journal of International Economics, Elsevier, vol. 89(2), pages 471-484.

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Journal Article: International risk cycles (2013)
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