Centre for Finance, Credit and Macroeconomics (CFCM)

CFCM Seminar: Dan Cao (Georgetown University)

Location
Zoom
Date(s)
Thursday 20th May 2021 (14:00-15:15)
Description

Real exchange rate dynamics beyond business cycles (with Martin DD Evans and Wenlan Luo)

Link to paper (.pdf)

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.

 

Centre for Finance, Credit and Macroeconomics

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