Authors: Sushant Acharya, Edouard Challe, and Louphou Coulibaly
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Staff Reports
The International RBC Model Finally Works!
Number 1197
July 2026
July 2026
JEL classification: F41, F44
We show that incorporating uninsurable countercyclical income risk into a standard international RBC model can qualitatively and quantitatively account for the quantity puzzles in open-economy macro, namely (i) the Backus-Smith puzzle, (ii) the Backus-Kehoe-Kydland puzzle, and (iii) the weak correlation between the trade balance and the exchange rate. We also show that our model can simultaneously account for the Fama puzzle and the evidence that high interest rate countries have stronger currencies—which representative-agents models that rely only on financial or demand shocks cannot jointly account for. Crucially, our model resolves all these puzzles while relying solely on productivity shocks and thus generates the observed domestic and cross-country macroeconomic comovement.
Author Disclosure Statement(s)
Sushant Acharya
I declare that I have no relevant material or financial interests that relate to the research described in this paper.
Edouard Challe
I hereby declare that they have no relevant or material financial interests that relate to the research described in this paper. I acknowledge financial support from the French National Research Agency (ANR-20-CE26-0018-01).
Louphou Coulibaly
I declare that I have no relevant material or financial interests that relate to the research described in this paper.
I declare that I have no relevant material or financial interests that relate to the research described in this paper.
Edouard Challe
I hereby declare that they have no relevant or material financial interests that relate to the research described in this paper. I acknowledge financial support from the French National Research Agency (ANR-20-CE26-0018-01).
Louphou Coulibaly
I declare that I have no relevant material or financial interests that relate to the research described in this paper.
Suggested Citation:
Acharya, Sushant, Edouard Challe, and Louphou Coulibaly. 2026. “The International RBC Model Finally Works!” Federal Reserve Bank of New York Staff Reports, no. 1197, July. https://doi.org/10.59576/sr.1197
Acharya, Sushant, Edouard Challe, and Louphou Coulibaly. 2026. “The International RBC Model Finally Works!” Federal Reserve Bank of New York Staff Reports, no. 1197, July. https://doi.org/10.59576/sr.1197
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