To match the stylised facts of goods and labour markets, the canonical New Keynesian model augments the optimising neoclassical growth model with nominal and real rigidities. We ask what the implications of this type of model are for asset prices. Using a second-order numerical solution to the...

Central puzzles in international macroeconomics are why fluctuations of the real exchange rate are so volatile with respect to other macroeconomic variables, and the contradiction of efficient risk-sharing. Several theoretical contributions have evaluated alternative forms of pricing under...