This paper proposes a theory of twin banking-currency crises in which both fundamentals and self-fulfilling beliefs play crucial roles. Fundamentals determine whether crises will occur. Self-fulfilling beliefs determine when they occur. The fundamental that causes twin crises' is government...

The wide cross-country disparity in rates of economic growth is the most puzzling feature of the development process. This paper describes a class of models in which this type of heterogeneity in growth experiences can arise as a result of cross-country differences in government policy. These...

The Real Business Cycle (RBC) research program has grown spectacularly over the last decade, as its concepts and methods have diffused into mainstream macroeconomics. Yet, there is increasing skepticism that technology shocks are a major source of business fluctuations. This chapter exposits the...

An understanding of the <i>qualitative</i> nature of the transitional dynamics of the neociassical model - the process of convergence from an initial capital stock to a steady state growth path - is a key part of the shared knowledge of most economists. It forms the basis, for example, of the...

The risk factors in many consumption-based asset pricing models display statistically weak correlation with the returns being priced. Some GMM-based procedures used to test these models have very low power to reject proposed stochastic discount factors (SDFs) when they are misspecified and the...

We offer a critique of the popular notion that the log-change of the real exchange rate equals the log-difference between the IMRSs of economically distinct agents in two economies. Contrary to existing claims, we show that this interpretation does not hold true in reduced-form SDF models that...

We study the properties of the carry trade, a currency speculation strategy in which an investor borrows low-interest-rate currencies and lends high-interest-rate currencies. This strategy generates payoffs which are on average large and uncorrelated with traditional risk factors. We argue that...

This paper proposes a set of novel pricing factors for currency returns that are motivated by microstructure models. In so doing, we bring two strands of the exchange rate literature, namely market-microstructure and risk-based models, closer together. Our novel factors use order flow data to...

When excess returns are used to estimate linear stochastic discount factor (SDF) models, researchers often adopt a normalization of the SDF that sets its mean to 1, or one that sets its intercept to 1. These normalizations are often treated as equivalent, but they are subtly different both in...

This paper assesses the empirical plausibility of the view that aggregate productivity shocks account for most of the variability in post World War II US output. We argue that the type of evidence forwarded by proponents of this proposition is too fragile to be believable. First, our confidence...