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

Author

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  • Hüseyin Çağrı Akkoyun
  • Yavuz Arslan
  • Mustafa Kılınç
Abstract
Most of the international macro models, in contrast to the data, imply a very high level of risk sharing across countries and very low real exchange rate (RER) volatility relative to output. In this paper we show that a standard two-country two-good model augmented with conintegrated TFP processes comes closer to matching the data. We first show that the tradable and non-tradable total factor productivity (TFP) processes of the US and Europe have unit roots and can be modelled by a vector error correction model (VECM). Then, we develop a standard two-country and two-good (tradable and non-tradable) DSGE model and study the quantitative implications. 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.

Suggested Citation

  • Hüseyin Çağrı Akkoyun & Yavuz Arslan & Mustafa Kılınç, 2017. "Risk sharing and real exchange rates: the role of non-tradable sector and trend shocks," BIS Working Papers 613, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:613
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    Cited by:

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    4. Kyriacos Lambrias, 2020. "Real exchange rates and international co-movement: News-shocks and non-tradable goods with complete markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 154-169, January.

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    More about this item

    Keywords

    trends shocks; risk sharing; real exchange rates;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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