Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/50633
Authors: 
Bhattacharjee, Arnab
Chadha, Jagjit S.
Sun, Qi
Year of Publication: 
2008
Series/Report no.: 
School of Economics discussion papers 08,08
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.
Subjects: 
current account dynamics
real exchange rates
incomplete markets
financial frictions
JEL: 
E32
F32
F41
Document Type: 
Working Paper

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