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

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  • Akkoyun, Hüseyin Çağrı
  • Arslan, Yavuz
  • Kılınç, Mustafa

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.

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  • Akkoyun, Hüseyin Çağrı & Arslan, Yavuz & Kılınç, Mustafa, 2017. "Risk sharing and real exchange rates: The role of non-tradable sector and trend shocks," Journal of International Money and Finance, Elsevier, vol. 73(PA), pages 232-248.
    • Handle: RePEc:eee:jimfin:v:73:y:2017:i:pa:p:232-248
    DOI: 10.1016/j.jimonfin.2017.02.003
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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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