Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/230443 
Year of Publication: 
2019
Series/Report no.: 
Cardiff Economics Working Papers No. E2019/10
Publisher: 
Cardiff University, Cardiff Business School, Cardiff
Abstract: 
We ask whether a model of the US and Europe trading with the rest of the world can match the facts of world behaviour in a powerful indirect inference test. One version has uncovered interest parity (UIP), the other risk-pooling. Both pass the test but the most probable is risk-pooling. This is consistent with risk-pooling failing a number of single equation tests, as has been found in past work; we show that these tests will typically reject risk-pooling when it in fact prevails. World economic behaviour under risk-pooling shows much stronger spillovers than under UIP with opposite monetary responses to the exchange rate. We argue that the risk-pooling model therefore demands more attention from policy-makers.
Subjects: 
Open economy
UIP
risk-pooling
test
Indirect Inference
JEL: 
C12
E12
F41
Document Type: 
Working Paper

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