| By: |
Cao, Dan;
Evans, Martin;
Lua, Wenlan |
| Abstract: |
We examine how medium-term movements in real exchange rates and GDP vary with
international financial conditions. For this purpose, we study the
international transmission of productivity shocks across a variety of IRBC
models that incorporate different assumptions about the persistence of
productivity shocks, the degree of international risk sharing and access to
international asset markets. Using a new global solution method, we
demonstrate that the transmission of productivity shocks depends critically on
the proximity of a national economy to its international borrowing limit. We
then show that this implication of the IRBC model is consistent with the
behavior of the US-UK real exchange rate and GDP over the past 200 years. The
model also produces a negative correlation between relative consumption growth
and real depreciation rate consistent with more recent data, and hence offers
a resolution of the Backus-Smith puzzle. |
| Keywords: |
Real Exchange Rates, International Real Business Cycles, Global Solution Methods |
| JEL: |
C60 F30 F31 F41 F44 G11 |
| Date: |
2020–03–10 |
| URL: |
http://d.repec.org/n?u=RePEc:pra:mprapa:99054&r=all |