NDLI: Addressing International Empirical Puzzles: the Liquidity of Bonds

Content Provider	Springer Nature Link
Author	Canzoneri, Matthew Cumby, Robert Diba, Behzad
Copyright Year	2013
Abstract	Models that assume bonds denominated in different currencies are perfect substitutes can not explain certain empirical puzzles: the exchange rate volatility puzzle is that these models can not explain the observed volatility in real and nominal exchange rates; the Backus-Smith puzzle is that these models can not explain the observed low correlation between real exchange rates and the ratio of home to foreign consumption; the Backus-Kehoe-Kydland puzzle is that these models can not explain the observed low correlation between home and foreign consumption; and finally, the uncovered interest parity puzzle is that these models can not explain the observed deviations from that parity. These long standing puzzles make the models harder to defend. In this paper, we present a symmetric two country portfolio balance model in which home and foreign bonds are imperfect substitutes for money in each country’s transactions technology; this of course makes home and foreign bonds imperfect substitutes for each other. Our calibrated model is capable of addressing the Backus-Smith puzzle and the Backus-Kehoe-Kydland puzzle. It does not fully resolve the exchange rate volatility puzzle, but it makes some headway. And finally it generates deviations from uncovered interest parity, though by some estimates these deviations are not large enough to be consistent with the data.
Starting Page	197
Ending Page	215
Page Count	19
File Format	PDF
ISSN	09237992
Journal	Open Economies Review
Volume Number	24
Issue Number	2
e-ISSN	1573708X
Language	English
Publisher	Springer US
Publisher Date	2013-02-01
Publisher Place	Boston
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Empirical Puzzles International Economics Development Economics European Integration Macroeconomics/Monetary Economics Economic Policy Financial Economics
Content Type	Text
Resource Type	Article
Subject	Economics and Econometrics

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4	Project PI / Joint PI	Principal Investigator and Joint Principal Investigators of the project	Dr. B. Sutradhar bsutra@ndl.gov.in Prof. Saswat Chakrabarti will be added soon
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