Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
962341 | Journal of International Economics | 2013 | 14 Pages |
Abstract
Recent work in international finance suggests that exchange rate puzzles 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 equity risk premia in 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.
Keywords
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
François Gourio, Michael Siemer, Adrien Verdelhan,