High interest rate currencies tend to appreciate. This is the uncovered interest rate parity (UIP) puzzle. It is primarily a statement about short-term interest rates and how they are related to exchange rates. Short-term interest rates are strongly affected by monetary policy. The UIP puzzle,...

A basic tenet of lognormal asset pricing models is that a risky currency is associated with a low pricing kernel volatility. Empirical evidence implies that a risky currency is associated with a relatively high interest rate. Taken together, these two statements associate high-interest-rate...

that central banks incur for implementing Taylor rule type policies.

N/A

and dynamic interaction between volatility and growth.

We explore the properties of Pareto optimal allocations when agents have heterogeneous recursive preferences. The dynamics of individual consumption growth reflect not just standard mean-variance tradeoffs as in the expected-utility model, but also tradeoffs involving the timing of the...