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Empirical moments of asset prices and exchange rates imply that pricing kernels are almost perfectly correlated across countries. Otherwise, observed real exchange rates would be too smooth for high Sharpe ratios. However, the cross country correlation among macro fundamentals is weak. We...
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This paper examines the effects of trade costs on macroeconomic volatility. We first construct a dynamic, two-country general equilibrium model, where the degree of market integration depends directly on trade costs (transport costs, tariffs, etc.). The model is a extension of Obstfeld and...
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A key property of the Aiyagari-type heterogeneous-agent models is that the equilibrium interest rate of public debt lies below the time discount rate. This fundamental property, however, implies that the Ramsey planner's fiscal policy may be time-inconsistent because the forward-looking planner...
Persistent link: https://www.econbiz.de/10014048725
This paper illustrates a challenge in analyzing the learning algorithms resulting in second-order difference equations. We show in a simple monetary model that the learning dynamics do not converge to the rational expectations monetary steady state. We then show that to guarantee convergence,...
Persistent link: https://www.econbiz.de/10014048757
Our paper examines whether the well-documented failure of unsophisticated investors to rebalance their portfolios can help to explain the enormous counter-cyclical volatility of aggregate risk compensation in financial markets. To answer this question, we set up a model in which CRRA-utility...
Persistent link: https://www.econbiz.de/10013039336
Assuming a neoclassical production technology, this paper characterizes constrained efficient intertemporal wedges for the macro aggregate as well as the micro individual allocation of dynamic Mirrleesian economies. We first construct “Pareto-Negishi weights” from the multipliers on a...
Persistent link: https://www.econbiz.de/10012903385
We show in a simple monetary model that the learning dynamics do not converge to the rational expectations monetary steady state. We then show it is necessary to restrict the learning rule to obtain convergence. We derive an upper bound on the gain parameter in the learning rule, based on...
Persistent link: https://www.econbiz.de/10013219616