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Can a small New Keynesian model of the world economy with risk-pooling match the facts?

Minford, Anthony, Ou, Zhirong and Zhu, Zheyi 2020. Can a small New Keynesian model of the world economy with risk-pooling match the facts? International Journal of Finance and Economics 10.1002/ijfe.1890

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Abstract

We ask whether a model of the US and Europe trading with the rest of the world can match the facts of world behaviour in a powerful indirect inference test. One version has uncovered interest parity (UIP), the other risk‐pooling. Both pass the test but the most probable is risk‐pooling. This is consistent with risk‐pooling failing a number of single‐equation tests, as has been found in past work; we show that these tests will typically reject risk‐pooling when it in fact prevails. World economic behaviour under risk‐pooling shows much stronger spillovers than under UIP with opposite monetary responses to the exchange rate. We argue that the risk‐pooling model therefore demands more attention from policy‐makers.

Item Type: Article
Date Type: Published Online
Status: In Press
Schools: Business (Including Economics)
Publisher: Wiley
ISSN: 1076-9307
Date of First Compliant Deposit: 19 June 2020
Date of Acceptance: 18 June 2020
Last Modified: 31 Aug 2020 16:28
URI: http://orca.cf.ac.uk/id/eprint/132649

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